Examples From Indian Market

Examples From Indian Market

SBI-HUDCO Bank of India has entered into a long-term rupee- Japanese yen swap with Housing and Urban Development Corporation (HUDCO).

According to a press release, HUDCO has swapped its foreign currency liability of Yen 2089 billions for equivalent rupee resources with SBI for a tenor of 10 years. Under the arrangement, HUDCO will deposit its yen with SBI on the day of transaction and SBI in return will pay the equivalelnt rupee resources to HUDCO.

According to officials, the swap will be done at the prevailing exchange rate on the day of the transaction. According to officials, HUDCO will use the rupee resources for lending to their projects in India. The overseas branches of SBI in Japan to fund their own assts will use yen. As per the swap agreement, SBI would provide the long-term hedge to HUDCO for a period of 10 years to cover the exchange risk of the foreign liability.

As a result of this, the swap will neutralize both the exchange rate risk and interest rate risk of HUDCO on yen loan by converting the yen flows into risk neutral fixed interest rate rupee flows for the company. At the end of 10 years, HUDCO will take back the yen by giving the rupee equivalent to SBI.

Earlier SBI had stuck a rupee-dollar swap of sizable transaction with ICICI. At present, the bank is considering similar deals with companies, which do not have international presence to manage the fo9reign currency risk effectively, said an official.

The bank is actively involved in developing the derivative market in India by facilitating the use of hedging instruments such as currency swaps. This has been possible after the permission was granted by the RBI to enable the corporate to obtain suitable hedge for their exposures arising out of their foreign currency loans.