Indian Banks Seek RBI Subsidy for Dollar Funding Hedging Costs

India Seeks Central Bank Subsidy to Boost Overseas Borrowings

The Reserve Bank of India (RBI) has been approached by Indian banks to provide subsidized forex hedging costs to raise overseas borrowings. This move comes as the central bank aims to boost dollar inflows into the economy. According to sources familiar with the discussions, the RBI met with treasury heads of large banks last week to discuss this proposal ahead of a monetary policy review on June 5.

At the meeting, bankers proposed a mechanism that would allow companies to hedge dollar-denominated borrowings through lenders, while banks access lower-cost swaps from the central bank. This, they argued, would help reduce the overall cost of raising overseas funds. The RBI is reportedly comfortable with bearing 150 basis points of the hedging cost, which would make dollar borrowing cheaper than local fundraising. However, some banks have requested higher discounts.

The proposed subsidy could help raise up to $50 billion, according to sources. However, it remains unclear whether this subsidy will be available to select borrowers or all borrowers. The RBI did not respond to a Reuters email seeking comment.

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India's economy is facing significant challenges, including elevated crude oil prices and relentless outflows from Indian equities. Economists have warned that this could lead to a large deficit in the country's balance of payments this financial year. The Indian rupee has been one of the worst performing Asian currencies, dropping as much as 4.7% against the dollar since the Iran war began.

To address these challenges, the RBI Governor, Sanjay Malhotra, has emphasized the need to improve the country's current and capital accounts. The RBI is also considering several steps to counter the depreciation of the rupee, including mobilizing dollar inflows through various means.

Timeline

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• June 5: RBI monetary policy review
• Earlier this month: RBI begins studying ways to mobilize dollar inflows
• Last week: RBI meets with treasury heads of large banks to discuss proposals

Key Figures

• Sanjay Malhotra: RBI Governor
• Piyush Goyal: Indian Trade Minister