Low-Cost Forex Funding
The Indian banks are now cutting down on their dependency on short term borrowings from abroad as
the Reserve Bank of India keeps on taking measures towards making available cheaper foreign
currency borrowings to the banks. It is due to the changing approach to borrowing by Indian banks,
caused by changing liquidity conditions and the support of the regulator for the new approach.
Having taken several measures to facilitate low-cost foreign exchange (forex) borrowings by Indian
banks, the RBI has forced Indian banks to change their approach towards borrowing in the
international markets and to cut down on their dependence on short tenure debt instruments.
Several Indian banks have allegedly reduced their issuance of short-term debts to the international
market in response to the new situation in the country.
As mentioned by market analysts, while short-term borrowing from foreign markets can be relatively
flexible in nature, it usually tends to put banking institutions at a risk of refinancing problems and cost
escalations when it comes to the period of global economic uncertainties. In this respect, the RBI
initiative to make foreign exchange funding cheaper can be viewed as an effort to minimize the risks
associated with this type of practice while ensuring that banks have easier access to better liquidity.
Moreover, it has to be noted that at present the state of interest rates and currency markets globally is
not homogeneous, and hence banks are becoming relatively cautious. One of the major reasons why
banks choose to reduce short-term borrowing is that they want to save their balance sheet from any
cost shocks due to sudden increase in funding costs and currencies.
However, at the same time, it is expected that foreign exchange liquidity arrangements will enable
banks to have better access to foreign currency at lower prices.
Generally speaking, this fact reveals a certain trend in the development of India’s banking system
aimed at securing its foreign exchange liquidity.
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