India’s overseas borrowing revival is losing the conditions that made it possible. Higher dollar rates and more expensive currency hedges are weakening the case for raising money abroad, even for highly rated borrowers. As the Reserve Bank of India’s concessional swap window approaches its drawdown deadline, domestic lenders and bond investors face the prospect of absorbing more of that demand.

The implications extend beyond the cost of a dollar loan. Borrowers still need to fund assets and refinance liabilities, and bank loans and short-term paper are already offering alternatives to longer-term bonds. If overseas funding becomes less competitive, pressure on domestic credit spreads could build before it becomes visible in corporate bond issuance.

External commercial borrowing registrations, including foreign currency convertible bonds, fell 30% to $42.9 billion in 2025–26 from $61.2 billion a year earlier, as per RBI data.

Non-bank lenders’ borrowing fell to $16.8 billion from $27.3 billion, while manufacturing registrations nearly halved to $7.3 billion from $13.9 billion.

The subsequent recovery gathered pace through August, helped by the subsidised swap facility, subdued US yields and lower forward premiums.

Those conditions have deteriorated. Three- to five-year US Treasury yields are now 40–50 basis points above their June–August levels, having earlier risen 70–80 basis points. One-year dollar/rupee forward premiums have moved to 4–4.5%, from 3–3.25%. The cost advantage that supported the revival is shrinking.

Costly Cover
For a AAA-rated non-bank lender, the arithmetic has turned against offshore borrowing. A five-year dollar swap benchmark of 4.40%, plus a credit spread of 130 basis points, gives an indicative interest cost of 5.70%. Add the current one-year hedging cost of 4.25%, and the annualised rupee cost reaches about 9.95%, compared with 8.75% for a five-year rupee bond.

That 120-basis-point gap is large enough to influence funding decisions. The overseas estimate also relies on renewing a one-year currency hedge against five-year debt, leaving subsequent costs exposed to forward premiums. The domestic bond fixes the rupee borrowing rate at issuance.

The public-sector comparison looks more puzzling.

Using a 100-basis-point credit spread over the same dollar benchmark and the concessional 1.50% swap rate produces an indicative cost of 6.90%, before fees.

Yet one large, AAA-rated public-sector borrower recently issued five-year rupee bonds at 8.27%. Another AAA-rated public financial institution has been raising substantial one-year money through certificates of deposit at around 8.30%.

The apparent saving is not available to every transaction.

The RBI facility excludes external commercial borrowings used to refinance or repay existing external commercial debt. Its December 31 deadline applies to eligible drawdowns; swaps already booked can run with the borrowing for up to five years. A rupee issue therefore cannot be judged against the concessional dollar rate without knowing its purpose and eligibility. The one-year certificate of deposit also serves a different maturity requirement from a five-year loan.

For eligible borrowing, wider credit spreads or higher arranger fees could still erode the headline advantage. Heavy debt issuance to finance artificial intelligence investment and concentrated investor exposure to Indian issuers are plausible constraints, although neither is established by the domestic transactions alone. Large upfront fees may also create audit concerns for public-sector borrowers. The executable price matters more than a benchmark calculation.

Domestic Pressure
Interest-rate swaps are helping lenders adapt their rupee funding. Non-bank lenders and public financial institutions are receiving fixed rates and paying floating rates in five-year overnight index swaps. Combined with fixed-rate rupee debt, this creates a floating-rate liability that better matches their loan books. Assets earning the Mumbai interbank offered rate plus 400 basis points, funded at that benchmark plus 200 basis points, would leave a gross interest spread of 200 basis points.

The immediate adjustment is visible in the choice of instruments. Issuance of certificates of deposit and commercial paper rose 25–30% during April–October 2026 compared with the same period a year earlier, while corporate bond issuance fell. With bank loans still priced 30–40 basis points below corporate bonds, borrowers have had an incentive to use bank balance sheets.

This is occurring while bank credit growth has accelerated to 21.6% as of September 30, from 10.6% a year earlier, with non-food credit growing 21.4%. As banks accommodate additional funding demand, the price advantage of loans over bonds becomes a variable to watch.

The risk for bond investors is a delayed supply response. If bank pricing rises or lending appetite tightens, some borrowing now accommodated through loans and short-term instruments could return to the bond market. Borrowers relying more heavily on short-term instruments must also refinance more often, leaving them exposed to changes in domestic funding conditions.

Once the December drawdown deadline passes, the concession will no longer support fresh eligible public-sector borrowing unless it is extended. Greater competition for domestic funding could then put upward pressure on credit spreads. For bond investors, a lower issuance tally offers limited comfort when the economics of refinancing are steadily turning borrowers towards rupees.