Mumbai: Reserve Bank of India's (RBI) new hedging window that lowers the cost of dollar borrowings for the rest of the calendar year is set to spur a fresh wave of overseas fundraising by state-owned lenders. This signals a likely revival in a funding route that saw a sharp slowdown last year.
At least five large institutions—Housing and Urban Development Corp. (Hudco), National Bank for Financing Infrastructure and Development (NaBFID), Power Finance Corp. (PFC), Rural Electrification Corp. (REC) and Indian Railway Finance Corp. (IRFC)—are planning to raise over $5 billion through external commercial borrowings (ECBs), as the scheme announced last week could make overseas funding cheaper than domestic debt for these infrastructure financiers, according to five officials in the know.
Hudco is among the first movers, as it plans to raise about $1 billion through ECBs by the month end, a company official said on the condition of anonymity.
“We will be raising it very shortly. The company plans to raise a $1 billion-equivalent loan immediately and another $1 billion before the RBI window closes," the company official said. "We have more or less already tied it up, and by the end of this month we should be able to draw it.” Discussions are at an advanced stage with three foreign banks, the official added.
Hudco expects the overseas loan to be substantially cheaper than domestic borrowings—“at least 60-70 basis points (bps) lower than domestic bonds,” the official said.
Infrastructure financier NaBFID is also planning a sizable overseas fundraising programme. “Yes, we will definitely do it. Maybe $2-3 billion before the RBI window closes,” a senior official said on the condition of anonymity. While the lender expects overseas borrowings to increase from its original plans, the same is unlikely to account for more than half of the total funding it needs.
On Monday, PFC floated a request for proposal (RFP) to invite bids from banks for foreign currency term loan through the ECB route.
REC, another large infrastructure financier, is also preparing to tap the route, although it is awaiting clarity on how much of the RBI’s subsidy banks will pass on to borrowers.
“There is already work underway. We are ready to raise today itself, but banks need a few days to finalize the processes,” an REC official said, adding that the new measure by the RBI could significantly increase foreign borrowings if pricing becomes attractive.
“If foreign borrowing costs 8%, I won’t raise a single rupee. If it comes around 6.3-6.5%, I can raise as much as possible,” the company official said, adding that REC already has more than $1.5 billion worth loan lines available through its existing banking relationships.
IRFC, a regular issuer in the offshore markets, also said it is evaluating the facility. “We haven’t had any internal discussions yet, but it is a possibility,” a company official said.
An email sent on Wednesday to Hudco, NaBFID, REC, PFC and IRFC on the matter did not elicit any response until press time.
On 5 June, announcing its monetary policy review, RBI announced it will provide a concessional forex swap facility for ECBs raised by public sector undertakings until 31 December 2026 for a maximum tenor of five years. Under the scheme, the central bank will effectively bear the full cost of hedging the dollar exposure, allowing borrowers to access overseas funds at significantly lower overall costs. The facility has also been expanded to Indian banks.
The facility will also be available for the undrawn portion as on date for any existing ECB, but will not be available for borrowings with embedded options, or for refinancing.
Overseas foreign currency borrowings (OFCBs) raised by authorized dealer category-I banks for three-five years have been allowed and swap will be undertaken at a fixed rate of 1.5% annually, compounded semi-annually.
Currently, dollar-rupee forward rates are hovering a tad over 3% annually, according to a report by SBI’s Ecowrap on 9 June.
RBI's new facility mirrors the previous ECB swap window introduced during the 2013 US ‘taper tantrum’-led rupee crisis and is aimed at attracting foreign capital inflows while easing pressure on the currency.
“We estimate that with 7-10x leverage and spread of 1.5-2%, customers can generate 17-27% $-IRR (internal rate of return) annually over 3-5 years,” Jefferies said in a report on 8 June, adding that India could see inflows of $50-70 billion.
Experts see local banks also making the most of the scheme. “It is extremely conducive, as the landed cost for them is comparable to the cost of generating incremental liquidity," said Anjan Agarwal, India head of debt capital markets at JPMorgan. "We expect Indian banks to be aggressive in raising capital both through loans and bonds.”
In a report on 5 June, Barclays said it sees "an uptake of around $10-15 billion over the next few months, but demand will still be constrained by the fact that global rates are still elevated.”
According to merchant bankers, conversations with overseas investors indicate a strong appetite for the new structure, as RBI’s decision addresses one of the biggest deterrents for overseas borrowings.
In FY26, inflows through ECBs and foreign currency convertible bonds (FCCB) declined by 30% to $42.9 billion from the $61.2 billion in FY25, data from SBI’s report showed. Of the total, state-owned financiers raised $2.94 billion and oil PSUs raised $1.15 billion last fiscal year.
“Even within the overall borrowings, the share of CPSEs (central public sector enterprises) has been rather miniscule, going by name screening wherein select large entities, EXIM Bank to OMCs to NaBFID, raised just 11% of the total amount in FY26,” the report said.
Overseas borrowings were lower last year because domestic rates were favourable after the monetary policy easing and due to the pivot on the rate trajectory by the US Federal Reserve, along with higher hedging costs that made such loans costly.