PSU Borrowing: Overseas Route Loses Luster

The concessional hedging window introduced by the Reserve Bank of India (RBI) for public sector companies' external commercial borrowings (ECBs) has seen its initial advantage fade within seventy days. This narrowing cost gap is primarily attributed to rising US Treasury yields and a significant increase in dollar issuance by Indian banks to fund Foreign Currency Non-Resident (FCNR) deposits.

As of 2026-08-13T00:57:21+00:00, the difference between overseas and domestic borrowing costs for public sector non-banking financial companies (NBFCs) has shrunk to approximately 8-10 basis points. This reduced incentive is forcing these entities to carefully weigh their funding options.

The situation has become challenging due to dual pressures: climbing US Treasury yields and a crowded dollar market for Indian issuers. Spreads over US yields have increased from around 100 basis points to between 110 and 130 basis points. Consequently, the all-in cost of dollar borrowing, including RBI's 1.5% hedging facility and other hedging costs, is now around 7.20%, closely mirroring domestic bond yields of approximately 7.28-7.30%.

This narrowing advantage has led to underwhelming uptake of the ECB scheme, with only $1.52 billion raised so far. The closure of the special FCNR deposit window in September is anticipated to ease some supply pressure, potentially leading to increased borrowing activity later. However, waiting carries the risk of fluctuating US Treasury yields based on Federal Reserve policy, inflation, and labor market conditions.

Some NBFCs are now viewing overseas borrowing more as a diversification tool than solely a cost-saving measure, seeking access to a broader investor base. The preference is leaning towards overseas term loans, potentially through hubs like Gift City, over dollar-denominated bonds due to tax implications and rate variability. PSU NBFCs must now optimize their funding mix across overseas borrowing, domestic bonds, and bank funding.