India is exploring the options of doing its first currency swap with the Asian Development Bank (ADB) to help the bank provide long-term rupee finance for infrastructure projects in the private sector.
“We are thinking about some innovative approaches. We issued rupee bonds and provided the proceeds directly to private companies. It is also possible to (similarly) contemplate currency swap for providing rupees to the companies,” says ADB vice-president Liqun Jin who is also head of South Asia and West Asia, as well as the bank’s private sector operations. He declined to discuss the specific amounts involved in the first such swap.
Currency swaps have been identified as one way of providing long-term debt financing for cash-strapped companies in India’s burgeoning infrastructure sector. When India agrees to the swap, then ADB will exchange dollars for an equivalent sum of rupees.
The exchange rate at which this transaction is conducted will be the same at which ADB will be repaid at the end of the tenure—normally around 20 years—of the swap.
Since the exchange rate for the transaction is fixed, there is no associated foreign currency risk for the bank.
Analysts believe the deal wo-uld be a positive step in incr-easing project financing, especially if the swap is in Asian currency. “Asia has the deepest forex reserves and conseq-uently is one of the biggest sources of capital,” said Harsh Shrivastav, vice-president, ma-rketing, with project management company Feedback Ventures Pvt. Ltd. “Of all the risks that are inherent in the infrastructure business, currency-swap would mitigate at least one risk. And for huge projects, such as ultra mega power projects, this is important.”
“We don’t want borrowing in foreign currency. But, if they allow a currency swap or local currency borrowing, then the currency becomes the colour that we want,” said an official of a large infrastructure finance company who did not wish to be named.
The initial ADB proposal is to strike an initial deal and then ramp it up to help meet the demand for infrastructure finance, which is currently pegged at $320 billion over the next five years. “While it mitigates foreign currency risk in the short term, it is also anti-inflationary in the long term. This is because the money will go towards creating capacities which will dampen inflation,” says Haseeb Drabu, chairman and chief executive of Jammu and Kashmir Bank Ltd.
ADB, which has done similar deals with other countries, believes that not only does the transaction reduce currency risk, it will also help in reducing the cost of the loan.
“Because it reduces the price of lending, it also improves the viability of the product. Hence, it is a win-win situation for everyone,” explains Robert M. Bestani, director general of the bank’s private sector finance department.
Anil Padmanabhan contributed to this story.