Key facts
- The RBI's new measures are projected to decrease banks' borrowing costs by 2-2.5% through external commercial borrowings (ECBs).
- A special swap facility for ECBs and Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits is expected to reduce hedging costs.
- Banks have increased FCNR(B) deposit rates to 6-7% for 3-5 year tenors to attract foreign currency inflows.
- These initiatives are anticipated to bolster India's foreign exchange reserves and enhance systemic liquidity.
The Reserve Bank of India's (RBI) recent policy adjustments aimed at incentivizing overseas borrowings are expected to significantly lower funding costs for Indian banks. According to a report by Motilal Oswal Financial Services, these measures could reduce borrowing costs by 2-2.5% through the external commercial borrowing (ECB) route, thereby improving liquidity conditions and enabling banks to raise resources more cheaply.
The report highlighted that a concessional USD/INR swap facility offered by the RBI for ECBs and overseas foreign currency borrowings (OFCBs) will substantially decrease hedging expenses for banks. This makes it more attractive for them to mobilize funds from abroad while maintaining controlled funding costs.