The cost advantage for public sector entities borrowing overseas has dropped to 8-10 basis points, making domestic debt markets more attractive. Rising US Treasury yields and increased dollar borrowing by banks have eroded the benefit of the Reserve Bank of India’s concessional hedging window. Companies like REC, PFC, and HUDCO are now re-evaluating their funding plans as they navigate a shifting interest rate environment.
The financial edge that Indian public sector undertakings (PSUs) once enjoyed when borrowing in foreign markets is fading. The cost difference between raising money overseas and borrowing within India has narrowed to just 8-10 basis points (a basis point is 0.01%), making the international route significantly less attractive than it was just a few months ago.
Why the Cost Advantage Has Narrowed
The primary reason for this shift is a rise in US Treasury yields, which acts as a benchmark for global dollar-denominated loans. At the same time, Indian banks have been borrowing heavily in dollars to fund Foreign Currency Non-Resident (FCNR) deposits. This increased supply of Indian paper in international markets has pushed up the borrowing spreads—the extra interest cost paid over the benchmark yield—to roughly 110-130 basis points.
While the Reserve Bank of India (RBI) continues to offer a concessional hedging facility that helps lower the cost of converting dollar debt back into rupees, market forces are overpowering this benefit. Currently, the total cost of dollar borrowing for these entities works out to approximately 7.20%. In comparison, domestic bond yields for top-tier PSU lenders are hovering between 7.28% and 7.30%. With the gap closing so tightly, many companies no longer see a compelling financial reason to deal with the complexities of overseas borrowing.
Impact on Major PSU Lenders
Public sector non-banking financial companies (NBFCs), including Rural Electrification Corp (REC), Power Finance Corp (PFC), and Housing and Urban Development Corp (HUDCO), are now pausing to reconsider their funding strategies. These entities, which the regulator classifies as 'Upper Layer' NBFCs, face stricter oversight regarding capital adequacy and risk management. As a result, they need consistent and cost-effective access to funds to maintain their lending operations.
These lenders now face a difficult choice: they can either wait for global interest rates to become more favorable, rely on domestic bond issuances, or explore alternative routes like international term loans. Unlike fixed-coupon bonds, some of these lenders are looking at term loans via hubs like Gift City, which can offer more flexibility and potentially lower tax burdens.
What Investors Should Monitor
For investors, the key area to watch is how these companies manage their cost of funds. If the borrowing cost advantage remains thin, companies may shift their focus entirely to the domestic bond market. While this simplifies the process, it could increase their reliance on local liquidity.
Investors may also track the volume of future issuances. If these PSUs reduce their overseas borrowing, it could be a sign that they are prioritizing domestic stability over the potential, albeit currently slim, savings offered by foreign markets. The RBI’s concessional hedging facility is set to remain available until December 31, 2026, so market participants will be observing whether any future volatility in US interest rates widens the gap again, potentially making overseas routes attractive once more.