The Asian Development Bank (ADB) is in talks with India about a currency swap that would help fund infrastructure projects without adding to the inflows that are complicating monetary policy, senior officials said on Thursday.
Officials from the Manila-based ADB told Reuters on a visit to Mumbai a dollar-rupee currency swap could help fund India's infrastructure development needs, now estimated at $475 billion over five years, without currency risk to the end-user.
India's strong rate of economic growth and soaring stock market is attracting billions of dollars in direct and portfolio foreign investment, pushing up the rupee and causing a monetary policy headache for the Reserve Bank of India (RBI).
"We are exploring the possibility of currency swaps which we believe could meet the needs of the Reserve Bank of India in managing its monetary policy," said Liqun Jin, ADB vice-president, operations.
"We can also help the private-sector business finance their activities without foreign exchange risk. For the end-user, he just borrows rupees and pays back rupees."
ADB officials said India's finance ministry supported the idea, and indications were that RBI officials were also interested. India's banking system is awash with potentially inflationary excess cash due to central bank rupee sales for dollars to keep the exchange rate down. Selling billions of dollars for rupees on the open market would put further upward pressure on the rupee.
"The cleanest and best way of doing this is that we do a swap with them. We give them a basket of dollars and they give us a basket of rupees," Robert Bestani, ADB director general of private sector finance, said.
ADB officials gave no time horizon for an agreement, saying it could happen "any time". They were also discussing swaps with other countries including the Philippines, but hoped India would be first. While the amount would not match the total infrastructure funding needs, it would be "billions of dollars".
India's finance minister has said Asia's fastest-growing major economy after China needs $475 billion to upgrade its road, rail and power networks and unclog bottlenecks which risk fuelling inflation and hindering the pace of expansion long term.
"India has a growing capital market, but the market is not sufficiently deep to handle the massive amount of money that is needed," Bestani said. The ADB said its swap would not add to the dollar inflows as the dollars would be held in the central bank's reserves, and the amount to swap back at the end of the term is predetermined.
"If it is sitting in your savings account then there is no exchange position," Bestani said. "But if I give you dollars and you decide to go shopping with it, that is a very different transaction from the one that I have engaged with you."
As the lender, the ADB would offer long-term fixed rate financing for 15-20 years, which would reduce a borrower's risk and the cost of doing business. Borrowers must be developmental, like infrastructure or power companies in the private or state sector, providing the latter operated along market principles.
"The consumer actually ends up benefiting quite significantly in all this, be it electricity or water or mortgage. The risks come down, therefore the payments come down," Bestani said.