Lower hedging cost makes borrowing in dollars attractive for companies, says Bank of America

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The Reserve Bank of India’s dollar swap tool has reduced hedging costs, making borrowing attractive for companies, said Jayesh Mehta, managing director and country treasurer at Bank of America.

“This was a good move of doing two things together: a) getting RBI’s dollar reserve buildup by $10 billion at least for the next 3 years. b) Infusing liquidity, and it encourages people to bring in more dollars because before the swap window came in, the hedging cost was so expensive,” he added.

“Typically corporate would borrow on a floating-rate basis and then they do a swap which is USD interest rate swap (IRS) plus the forwards – that was something like 7.5 percent,” said Mehta.

In dollar swap, the RBI buys dollars from banks for three years and offers them rupees in return. The tool was introduced in March to bridge the liquidity gap.

“If you borrow offshore and hedge it with RBI, it gives much lower pricing,” he further added.

Talking about dollar movement, he said, “Thematically we will get to know only after election. So that is going to impact but imagine if this USD 10 billion would not have been done, this encourage dollar to flow in. People who are not even thinking to bring in dollars they brought this USD 10 billion. So to that extent it is kind of supported because otherwise there are no flows coming in dramatically right now.”

On OMO front, Mehta said, “Immediate impact of open market operations (OMO) announcement in May will be around 5-7 bps lower but we still have to see.”

“Extreme deficit is now definitely out but whether should it be 50,000-70,000 crore short deficit or whether it should be 50,000-70,000 crore surplus deficit. So till we get a clarity on that, bond market can be supported only by OMO. So unless you have 70,000-80,000 crore surplus in the system then only you will actually see the rate transmission happening because that will bring down the deposit rate,” Mehta added.

Source: CNBC-TV 18


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