The State Bank of India (SBI), the country's largest commercial bank, concluded a long-term rupee-yen swap with the Housing and Urban Development Corporation Ltd (Hudco), a news release from the SBI said yesterday.
As per the swap arrangement, the SBI would provide Hudcowith a long term hedge for a period of ten years to cover the exchange rate risk borne on its foreign currency borrowing of JPY 2.89 billion.
The rupee interest rate which Hudco will have to pay will be a fixed rate linked to the SBI's prime lending rate (PLR). SBI will pay a rate linked to the Tokyo Inter-Bank Offer Rate (Tibor).
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"Such a swap arrangement would effectively neutralise both the exchange and interest rate risks that Hudco carries on its JPY loan and would convert
the JPY flows into the risk neutral fixed interest rate rupee flows for the company," the statement said.
SBI further said that it would structure similar products, for longer tenures, for other corporates which wanted to swap either dollars for rupees or rupees for dollars to take advantage of interest rates.
A currency swap effectively allows the counter-parties swapping one currency liability for another in order to hedge themselves against exchange rate and interest rate movements. The statement said SBI was actively engaged in developing the market for derivatives in India including long term rupee-foreign currency swaps. The SBI's treasury management group at its international division in Mumbai was overseeing the structuring and execution of such swap arrangements and other derivative products for corporates in India, the statement said.
Indian corporate entities were allowed to enter into currency swaps by the Reserve Bank of India as a means of hedging their exposures arising from foreign currency borrowings.