MUMBAI, Sept 19 (Askume) – Indian companies are considering cross-currency swaps to convert some rupee debt into dollars to reduce borrowing costs as U.S. interest rates fall, six bankers told Askume.
The Federal Reserve began easing on Wednesday, cutting interest rates by a larger-than-expected 50 basis points . According to the central bank’s forecast, borrowing costs are expected to fall by a total of 200 basis points over the next 15 months.
Two Indian groups, a local unit of a global investment firm and a renewable energy company, recently used cross-currency swaps to convert rupee liabilities into dollars, a banker at a foreign bank said.
The banker spoke on condition of anonymity as he was not authorised to speak to the media.
Cross-currency swaps are derivative commodity structures that allow companies to convert loan principal, interest repayments, or both, from one currency to another, helping to manage interest rate and foreign exchange risks.
Ashish Vaidya, managing director and treasurer for global financial markets at DBS Bank in India, said: “Those who expect lower interest rates in the United States in the future may consider currency swaps or net principal swaps as a cost-reduction measure.” One may also consider converting Indian rupee liabilities into floating rate US dollar liabilities.
Bankers and foreign exchange advisors are advising their clients to use the two-year currency swap as it currently offers the highest interest rate savings, bankers said.
The U.S. Secured Overnight Financing Rate (SOFR), the benchmark interest rate for U.S. dollar-denominated derivatives, has fallen on expectations of interest rate cuts, with the 2-year SOFR falling 35 basis points so far in September to 120 basis points.
In comparison, India’s 2-year Bombay Interbank Offered Rate fell only 20 basis points in September and only 74 basis points this quarter.
The widening interest rate differential between the United States and India provides companies with a greater margin of safety when converting rupee borrowings to US dollar borrowings through currency swaps.
Currency exchange is not without risks
Currency swaps can save companies on interest costs, but they also expose them to foreign exchange risk, which can wipe out the interest savings and cause a company a loss if the value of the rupee is much lower at the time of the swap.
Analysts said lower volatility of the rupee has boosted corporate confidence in these businesses.
Companies that have a natural hedge through US dollar-denominated receivables may also be able to hedge some of their currency risk.
“Companies with strong risk management frameworks or natural hedges would be more inclined to go for such rupee-dollar swaps,” said Akshay Kumar, global head of markets in India at BNP Paribas.
