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India may swap currencies with ADB

The move will fetch dollars for funding infrastructure projects, report Monica Gupta and Sanjiv Shankaran.

india Updated: Jan 11, 2007 14:47 IST

The Finance Ministry is considering entering into a currency swap with the Asian Development Bank for funding infrastructure projects. The move, if approved, will allow the bank to bring dollars to India and lend the same to infrastructure companies after swapping them for rupees through an intermediary such as the Reserve Bank of India. Such swapping is expected to protect the local borrower from foreign exchange risk.

Finance ministry officials said that the proposal of the ABD would have to be examined by the Reserve Bank of India since it would impact money supply in the economy. "The proposal will allow another window to infrastructure companies to borrow funds. But there is expected to be limit on the amount of currency swap that ABD can undertake in a year," a finance ministry official said.

ADB's proposal has a precedent. International Finance Corporation entered into a currency swap pact with State Bank of India to lend within India and simultaneously cushion itself against foreign exchange risk.

ADB is among the few financial institutions which allow companies to borrow for a long period of time spread over 20 years. The bank had earlier been allowed to raise rupee bonds. It has already raised two tranches of rupee bonds worth $100 million each. "The bank has also sought permission to raise more rupee bonds. The bonds would be used purely for the infrastructure sector," the ministry official said.

The government has in the past allowed other financial institutions like International Finance Corporation (IFC) to undertake currency swap in India. In addition to allowing ADB a currency swap, the finance ministry is also talking to rating agencies like Crisil to undertake credit rating of special purpose vehicles, set up to undertake infrastructure projects in the country.

"Very often an SPV is set up merely on the basis of equity participation. There is no balance sheet of an SPV. This comes in way of the SPV being able to access funds at lower interest rates. Providing a credit rating to such SPV is expected to allow it to access cheaper funds," the official said.