RBI may need to absorb at least half of hedging cost to spur ECBs by PSUs
Mumbai, Jun 8, 2026
Synopsis
The Reserve Bank of India's new measures aim to boost foreign inflows. Public Sector Undertakings can now access concessional forex swaps for overseas borrowing until September 2026. Bankers suggest the RBI needs to cover at least half the hedging costs for this to make borrowing abroad cheaper and viable for these companies.
The Reserve Bank of India (RBI) will have to bear at least half the hedging cost of between 3.5% and 4%, to make it viable for public sector undertakings (PSUs) to raise debt abroad, bankers said.
For PSUs to borrow from abroad, the landed cost of funds should be lower or on par with the local funding costs, which a substantial reduction in hedging costs can achieve, bankers and public sector executives said.
As part of its monetary policy review on Friday, RBI announced five measures to attract foreign inflows into India as part of its support to revive the rupee.
Among the measures was a facility of concessional forex swap for external commercial borrowings (ECBs) by PSUs till 30th September 2026.
The details of this RBI incentive are sketchy because the central bank has not yet notified the scheme. However, bankers said the success of the scheme depends on how much RBI leaves on the table. PSU executives said the scheme should mean "a substantial" saving on interest rates to be viable.
"These new measures would be beneficial, especially for PSU companies like us who borrow from the international market. Because of the global volatilities, hedging costs have gone up, which has made overseas borrowing unviable. Hedging because of higher forward dollar premiums has increased to more than 4%," said Rajkiran Rai, CEO, NaBFID (National Bank for Financing Infrastructure and Development). "The RBI's arrangement will definitely make it cheaper because they can provide us a swap facility at a substantial discount.
“This will bring costs down and also lead to some dollar inflows since borrowers will park their dollars with RBI in exchange for rupees,” he said.
A reduction in hedging costs will lead to lower overseas borrowing rates for PSUs, most likely bringing them on part with domestic borrowing rates.
“There are a host of PSUs which are borrowers from the overseas market; they include entities like Rural Electrification Corp (REC), Power Finance Corp (PFC), NaBFID, Power Grid Corp (PGC) and also oil companies. What a RBI facility will do will help bring the cost for these loans down may be on par with domestic borrowings. The notification is not out yet but we expect a bespoke arrangement with swap facilities different on the basis of borrowers, tenure and size,” said a bank executive with a large US based bank.
RBI governor Sanjay Malhotra has said the new facility will only be open to public sector undertakings.
[The Economic Times]
