Currency Swap Market Picking Up

Hongkong Bank has kick-started the currency swap market by placing a series of small deals in the domestic markets, prompting similar forays by other banks, including ABN AMRO Bank and HDFC Bank.

Besides, swap deals have emerged as an attractive option for corporates with interest rates on dollar loans ruling lower than domestic loan rates.

Says Amit Gupta, chief dealer of Hongkong Banks off balance sheet operations: Top corporates have been choosing currency swaps for hedging long-term foreign currency exposures in their books. However, what is now on offer is only for three years and the upper limit is only about $3 million, since the current ECB guidelines permit corporates to raise only this amount for such short maturities.

Currency swaps are agreements between two counterparties to exchange principal and interest rate obligations or receipts in any foreign currency against those in rupees for periods over a year.

The deals work as follows: the domestic currency liability is swapped with a foreign currency loan. The foreign currency liabilities are taken at a floating rate and the rupee liabilities are at a fixed rate.

According to Gupta, about $25 million worth of such transactions have already been concluded. In such deals, the exchange rate risk factor is built into the swap pricing.

As a result, says Gupta, the pricing could be as low as 14 per cent for domestic corporates even after factoring in the exchange risk element in the pricing.

However, ABN AMRO has adopted a different approach. It has chosen the route of working out long-term forward contracts for corporates hedging their foreign currency exposures.