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Hedging Costs Stifle Indian Debt Fundraising
25 May
Summary
- Offshore debt fundraising slowed in FY26 due to high hedging costs.
- Lenders propose RBI subsidize hedging costs to revive borrowing.
- Hedging costs have risen to 3.5%, making offshore borrowing costly.
External commercial borrowings (ECBs) for Indian entities decreased to $43 billion in fiscal year 2026, down from $61 billion the previous fiscal year. This decline is attributed primarily to elevated hedging costs, which have risen to approximately 3.5% annually, eroding the cost advantage of dollar borrowings. Bankers have informally requested the Reserve Bank of India (RBI) to consider mechanisms for reducing these effective hedging expenses.
Several proposals have been put forth, including the RBI subsidizing hedging costs or creating a dedicated facility through banks. Under this model, banks would access a lower-cost facility from the RBI to offer reduced hedging rates to corporates. This initiative aims to boost offshore debt inflows, which could add an estimated $30 billion to the economy, supporting India's balance of payments amidst weakening FDI and FPI flows.
Currently, fully hedged ECBs are proving more expensive than domestic rupee loans for Indian companies. For instance, ECB borrowings via GIFT City are priced at around 8.25%, compared to a domestic borrowing cost of nearly 7.25% for highly rated corporates. A subsidized hedging framework, potentially mirroring past FCNR deposit schemes, could revive crucial offshore debt flows into India.
