ABC Ltd, an Indian exporter, has a Rs. 82.25 crore term loan at 12.5% interest that it wants to reduce costs on. It receives USD and wants to leverage its net USD receivables. Through a rupee-dollar swap, ABC Ltd can shift its rupee liability to USD at a fixed rate of 62.02. This would reduce ABC Ltd's interest rate to 6.9% while receiving principal repayments in rupees on maturity dates. The swap provides benefits if the rupee depreciates versus the dollar but risks if the rupee appreciates beyond 6.9%. RBI regulations allow such swaps for companies meeting certain criteria to hedge foreign currency exposures.

1. Rupee-Dollar Swap

2. Product requirement
• ABC Ltd is a company having below mentioned
rupee exposure
• Total Rupee term loan …. Rs.82.25 Cr
• Rate of Interest… 12.50% pa
• Interest servicing … monthly rests
• Repayment … 10 equal half yearly instalments
of Rs.8.225 Cr commencing from 30th Sep
2015 and ending 31st March 2020

3. Repayment Schedule
Repayment Outstanding
24..02.2014 Rs. 82.25 crores
30.09.2015 Rs 8.225 crores Rs.74.025 crores
31.03.2016 Rs 8.225 crores Rs 65.80 crores
30.09.2016 Rs 8.225 crores Rs 57.575 crores
31.03.2017 Rs 8.225 crores Rs.49.35 crores
30.09.2017 Rs 8.225 crores Rs. 41.125 crores
31.03.2018 Rs 8.225 crores Rs 32.9 crores
30.09.2018 Rs 8.225 crores Rs 24.675 crores
31.03.2019 Rs 8.225 crores Rs 16.45 crores
30.09.2019 Rs 8.225 crores Rs 8.225 crores
31.03.2020 Rs 8.225 crores 0

4. Objective
•ABC Ltd wants to reduce the interest liability
on this loan
•ABC Ltd is an Exporter and receives USD.
•ABC Ltd wants' to leverage on there net USD
receivable position.

5. Product
Rupee-Dollar Swap
•In Rupee-Dollar Swap ABC Ltd will shift its liability from Rupee to USD.
•Lets assume Spot rate at the time of entering deal is 62.02
•No initial physical exchange of principal will take place (only notional exchange will take
place @ 62.02)
The following settlements will take place under Rupee-Dollar swap
A. ABC Ltd will receive interest @ 6.90% p.a. on the reduced outstanding Semi Annually
(can be customized as per requirement)
B. ABC Ltd will receive the Rs 8,22,50,000/-(as mentioned in slide 3) on respective
maturity dates
C. ABC Ltd will have to pay USD 1,326,186.11 (conversion rate is fixed at 62.02 = spot rate
as on date of entering the deal)

6. Scenario Analysis
CASE 1 : SPOT on Maturity date is Less than 62.02 i.e. 50
A. ABC Ltd Will be happy to fetch INR 8,22,50,000/- by paying USD 1,326,186.11 @
conversion rate of 62.02
B. ABC Ltd will further receive a positive carry of 6.90% p.a. on the reduced outstanding
(as per amortization schedule in slide 3)
Conclusion
ABC Ltd has effectively reduced its interest cost from 12.50% to ( 12.50%-6.90%)=5.60%
Its export receivable of USD 1,326,186.11 has fetched it INR 8,22,50,000/-@ 62.02 as
against the present market rate of 50 it could have fetched only INR 6,63,09,305/-
(Notional Gain of )
The net cost of rupee loan has reduced from 12.50% to 5.60% + the notional gain due to
rupee appreciation

7. Scenario Analysis
CASE 2 : SPOT on Maturity date is More than 62.02 i.e. 70(Rupee depreciated by 12.87%)
A. ABC Ltd Will be fetching INR 8,22,50,000/- by paying USD 1,326,186.11 @ conversion
rate of 62.02
B. ABC Ltd will further receive a carry of 6.90% p.a. on the reduced outstanding (as per
amortization schedule in slide 3)
Conclusion
Its export receivable of USD 1,326,186.11 has fetched only INR 8,22,50,000/-@ 62.02 as
against the present market rate of 70 it could have fetched INR 9,28,33,027/-
(Notional Loss)
Net loss : ABC Ltd will have to pay additional (12.87%-6.90%)=5.97%
Thus his cost on Rupee loan has increased from 12.50% to (12.50+5.97)=18.47%
Thus by entering this product ABC Ltd is able to generate arbitrage ONLY till rupee has
not depreciated beyond 6.90%(The positive carry it will receive by entering this deal)
This product will start generating negative result once
rupee has depreciated beyond 66.29

8. Regulations
Incorporated resident entities having a rupee liability and undertaking an INR –
foreign currency swap to move from rupee liability to a foreign currency liability,
subject to certain minimum prudential requirements, such as risk management
systems and natural hedges or economic exposures. In the absence of natural
hedges or economic exposures, the INR-foreign currency swap (to move from
rupee liability to a foreign currency liability) may be restricted to listed companies
or unlisted companies with a minimum net worth of Rs 200 crore. Further, the AD
Category I bank is required to examine the suitability and appropriateness of the
swap and be satisfied about the financial soundness of the corporate.
Further the operational guidelines of Rupee-Foreign currency swap attract below
mentioned stipulations
1. The Swap transaction once cancelled can not be rebooked again.
2. notional principal amount of the swap should not exceed the outstanding
amount of the underlying loan.
3. The maturity of the swap should not exceed the remaining maturity of the
underlying loan.
Source: RBI Master circular on risk management and interbank dealings dt 01st July 2013

9. Thank You
Raj Kumar Sharma