RBI Forex Swap Facility for PSU Borrowings: ECB Cost and FX Impact

RBI’s Concessional Forex Swap Facility for PSU Borrowings: Impact on Cost of ECB/OFCB Funding and Exchange Rate Risk

The Reserve Bank of India (RBI), vide circular dated 08.06.2026, has introduced a concessional forex swap facility for eligible Public Sector Undertakings (PSUs) raising funds through External Commercial Borrowings (ECBs) or Overseas Foreign Currency Borrowings (OFCBs). Under this facility, foreign currency borrowings with a maturity period of 3 to 5 years may be swapped with RBI at a fixed cost of 1.50% per annum, compounded half-yearly, thereby substantially mitigating the exchange rate risk associated with such borrowings.

Historically, ECBs have been one of the most economical sources of borrowing for Indian companies, as international benchmark rates have generally remained lower than domestic interest rates. In India, lending rates are largely influenced by the RBI Repo Rate together with the applicable credit spread based on the borrower’s risk profile. Similarly, overseas borrowings are generally priced with reference to the Secured Overnight Financing Rate (SOFR), along with an appropriate credit spread. Prior to SOFR, the London Interbank Offered Rate (LIBOR) served as the primary benchmark for international borrowings.

A comparison of the RBI Repo Rate and international benchmark rates over the last decade indicates that USD benchmark rates have generally remained below domestic rates, resulting in an apparent borrowing cost advantage for foreign currency loans. The Comparison is given below:

However, a lower benchmark interest rate alone does not necessarily translate into a lower overall borrowing cost. Borrowers must also consider the impact of exchange rate fluctuations. Any depreciation of the Indian Rupee against the US Dollar (USD) during the tenure of the loan increases the Rupee cost of servicing and repaying the foreign currency liability, which may significantly increase the effective borrowing cost.

For example, if a company borrows USD 1 million at an exchange rate of ₹90 per USD at a SOFR-linked interest rate of 4.10% per annum and the exchange rate depreciates to ₹98 per USD by the time of repayment, the effective Rupee cost of borrowing increases substantially.

Although the contractual interest rate remains 4.10%, the combined effect of interest payments and exchange rate movement results in an effective borrowing cost of approximately 13.35% per annum, which is considerably higher than a comparable Rupee loan carrying an interest rate of 5.25% per annum. This can be shown below:

In case of USD loan effective rate of interest is 13.35% (as against SOFR of 4.10%) and is used below:

While in case of Rs loan, effective rate of interest remains 5.25% only

Thus, while foreign currency loans may appear cheaper on the basis of interest rates alone, the actual cost of borrowing can be significantly affected by exchange rate movements.

The exchange rate of Rs/USD for last few years is given below:

As on 11.06.2026, Rs/USD is 95.

The USD/INR exchange rate is primarily driven by demand and supply conditions in the foreign exchange market. Typically, in case of ECB an Indian borrower raises funds in USD, converts the proceeds into Indian Rupees for domestic use, and subsequently purchases USD at the prevailing exchange rate for payment of interest and repayment of principal. Any depreciation of the Rupee during this period increases the borrowing cost in Rupee terms.

To address this challenge and encourage inflow of foreign currency into the country, RBI has introduced the above-mentioned swap facility for eligible borrowers. By allowing eligible borrowers to hedge their foreign exchange exposure at a fixed cost of 1.50% per annum (compounded half-yearly), the scheme significantly reduces uncertainty relating to exchange rate movements and improves predictability of borrowing costs.

The impact of the scheme can be illustrated through below example :

Example: A company borrows USD 1 million on 01.10.2026 at an exchange rate of ₹95 per USD for a period of three years at an interest rate of 4.30% per annum. Assuming an upward movement in the exchange rate to ₹99, ₹105 and ₹110 per USD at the end of the first, second and third years respectively, the effective borrowing cost in an unhedged position would increase substantially due to exchange losses.

However, under the RBI swap facility, the exchange rate exposure is effectively capped at the swap cost of 1.50% per annum as below. The comparison of unhedged position and under RBI scheme is as below:

Accordingly, the effective borrowing cost reduces from 8.69%, 11.07% and 10.24% in the first, second and third years respectively under an unhedged scenario to approximately 5.87%, 5.96% and 6.05% under the RBI scheme.

Accordingly, for eligible borrowers, the RBI swap facility can materially reduce the effective cost of foreign currency borrowing while simultaneously eliminating uncertainty arising from exchange rate volatility. The scheme is expected to facilitate greater access to overseas funding, improve foreign currency liquidity in the domestic market and potentially ease pressure on the exchange rate, subject to compliance with the eligibility conditions and other terms prescribed by RBI.

It may also be noted that RBI had introduced a similar swap facility in 2013. However, the swap cost under the earlier scheme was 3.50% per annum, whereas the swap cost under the present scheme has been fixed at a significantly lower level of 1.50% per annum, making the current facility comparatively more attractive for eligible borrowers.

A copy of the RBI circular dated 08.06.2026 is attached for reference.