RBI's Concessional Forex Swap Facility for PSUs: How It Reshapes the Economics of ECB and OFCB Funding
Background and Policy Context
The Reserve Bank of India, through a circular issued on 08.06.2026, has rolled out a concessional foreign exchange swap arrangement targeting eligible Public Sector Undertakings (PSUs) that access overseas capital markets via External Commercial Borrowings (ECBs) or Overseas Foreign Currency Borrowings (OFCBs). Under this mechanism, foreign currency loans with tenures ranging from 3 to 5 years can be swapped with the RBI at a fixed swap cost of 1.50% per annum, compounded on a half-yearly basis.
The primary objective of this intervention is to neutralise the exchange rate uncertainty that has historically made foreign currency borrowings a double-edged sword — attractive on paper due to lower benchmark rates, but potentially expensive in practice due to Rupee depreciation.
Why ECBs Have Been Preferred — And Why They Come With Hidden Costs
The Interest Rate Advantage of Overseas Borrowings
Traditionally, ECBs have been regarded as a cost-efficient funding route for Indian entities, particularly because global benchmark interest rates have historically trended below domestic lending rates in India. Domestic borrowing costs in India are largely anchored to the RBI Repo Rate plus a credit spread reflecting the borrower's risk profile. In contrast, overseas borrowings are typically benchmarked to the Secured Overnight Financing Rate (SOFR) — the successor to the erstwhile London Interbank Offered Rate (LIBOR) — along with an applicable credit spread.
A decade-long review of RBI Repo Rate versus USD benchmark rates reveals a consistent differential in favour of overseas borrowings:
| Year | RBI Repo Rate | USD Benchmark | Differential |
|---|---|---|---|
| 2016 | 6.25% | LIBOR ~1.0% | 5.25% |
| 2017 | 6.00% | LIBOR ~1.7% | 4.30% |
| 2018 | 6.50% | LIBOR ~2.8% | 3.70% |
| 2019 | 5.15% | LIBOR ~1.9% | 3.25% |
| 2020 | 4.00% | SOFR ~0.1% | 3.90% |
| 2021 | 4.00% | SOFR ~0.05% | 3.95% |
| 2022 | 6.25% | SOFR ~4.3% | 1.95% |
| 2023 | 6.50% | SOFR ~5.3% | 1.20% |
| 2024 | 6.50% | SOFR ~5.0% | 1.50% |
| 2025 | 5.25% | SOFR ~4.1% | 1.15% |
| 2026 (Jun) | 5.25% | SOFR ~4.3% | 0.95% |
Note: While the differential has narrowed considerably in recent years — from over 5% in 2016 to under 1% as of June 2026 — the nominal interest rate gap still suggests a theoretical cost advantage for foreign currency borrowings. However, this surface-level comparison is misleading without accounting for currency risk.
The Exchange Rate Dimension: The Real Cost Driver
The contractual interest rate on a foreign currency loan tells only part of the story. The actual effective cost in Rupee terms is heavily influenced by the movement of the INR/USD exchange rate over the loan tenure. As the Rupee depreciates against the US Dollar, the Rupee equivalent of both interest payments and principal repayment rises — sometimes dramatically.
The historical trajectory of the INR/USD rate underscores this risk:
| Year | Average ₹ per USD |
|---|---|
| 2016 | 67.17 |
| 2017 | 65.11 |
| 2018 | 68.41 |
| 2019 | 70.40 |
| 2020 | 74.11 |
| 2021 | 73.92 |
| 2022 | 78.60 |
| 2023 | 82.58 |
| 2024 | 83.68 |
| 2025 | 87.16 |
| 2026 (YTD) | ~92.48 |
As of 11.06.2026, the USD/INR rate stood at ₹95, reflecting the sustained depreciation trend of the Indian Rupee over the past decade.