RBI’s Buy-Sell Swap Strategy: Encouraging Overseas Borrowing by Indian Corporates

The Reserve Bank of India (RBI) has been actively conducting USD/INR buy-sell swaps to infuse durable liquidity into the banking system. This strategy has had a ripple effect on corporate borrowing, making external funding more attractive for Indian businesses.

A buy-sell swap involves the RBI purchasing US dollars in the spot market while simultaneously selling them in the forward market. This operation injects liquidity into the system and influences forward premia—an important factor in the cost of hedging currency risk for corporates borrowing in foreign currencies.

Reduces Borrowing Costs Indian Corporates 

One of the key impacts of the RBI’s buy-sell swaps has been the decline in USD/INR forward premia. The 1-year dollar-rupee forward premium dropped to 2.13% in October from a high of 2.71% in early January. A lower forward premium reduces the cost of currency hedging for Indian corporates borrowing in international markets, effectively lowering their overall borrowing costs.

For Indian businesses, especially those with international expansion plans or significant foreign currency obligations, this makes external commercial borrowings (ECBs) a more viable option compared to domestic lending.

Impact on Forex Reserves and Liquidity

India’s foreign exchange reserves have seen fluctuations due to RBI interventions aimed at managing rupee volatility. By encouraging corporates to raise funds from overseas markets, buy-sell swaps bring in fresh foreign capital, indirectly supporting forex reserves.

So far, the RBI has conducted buy-sell swaps worth $15 billion and has announced an additional $10 billion in swaps. These measures are part of a broader strategy to address a liquidity deficit that has persisted for 11 consecutive weeks.

Additionally, these swaps help the RBI extend the maturities of its forward book. The central bank currently holds net short positions worth $77.5 billion, a substantial portion of which is due within three months. Managing these maturities effectively helps stabilise market conditions.

Why NBFCs are Tapping Overseas Markets

Non-banking financial companies (NBFCs) have been increasingly turning to external commercial borrowings following the RBI’s decision in November 2023 to raise risk weights on bank lending to NBFCs. This regulatory change has prompted NBFCs to diversify their funding sources, making overseas borrowing a more attractive option.

According to RBI data, during April-December 2024, the share of effectively hedged external commercial borrowings—including explicitly hedged loans, rupee-denominated loans, and loans from foreign parent entities—rose to 78.1% from 61.6% in the previous year. This shift has helped mitigate interest rate and exchange rate risks associated with foreign borrowings.

Conclusion

The RBI’s buy-sell swap strategy is playing a crucial role in reshaping corporate funding dynamics in India. By lowering hedging costs and reducing forward premia, the central bank is indirectly incentivising businesses to raise capital from overseas markets. This, in turn, enhances liquidity, strengthens forex reserves, and helps manage financial market stability. While this strategy aligns with broader monetary policy goals, its long-term impact will depend on global interest rate movements and economic conditions.

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