Mumbai: The Asian Development Bank (ADB) has proposed a dollar-rupee fund swap that would help finance the country's infrastructure projects without adding to currency inflows into the system.
Senior officials of the Manila-based ADB, who are on a visit to Mumbai, said the bank is in talks with Indian authorities about a currency swap that would help keep money supply in the country in check without the Reserve Bank having to make recourse to a tight money policy.
A dollar-rupee currency swap could help fund India's infrastructure development needs, now estimated at around $475 billion over five years, they pointed out.
Foreign direct investments and stock market buys by overseas investors amidst strong economic growth and a soaring market are attracting billions of dollars into the country, causing a monetary policy headache for the Reserve Bank of India (RBI).
While finance ministry officials supported the idea, ADB officials said, indications were that RBI officials were also interested. The bank is exploring the possibility of currency swaps which could meet the needs of the Reserve Bank of India in managing its monetary policy, ADB vice-president, operations, Liqun Jin said.
He said ADB can also help the private-sector business finance their activities without foreign exchange risk. "He just can borrow rupees and repay in rupees," he said.
The cleanest way of easing the pressure on the rupee is to do a swap. "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.
Banks in India are awash with the potentially inflationary cash that the Reserve Bank has sold to keep dollar exchange rate down. Selling billions of dollars for rupees on the open market would put further upward pressure on the rupee.
ADB officials said 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," they pointed out.
Bestani said its swap would not add to the dollar inflows into the market 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.
"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," he added.
ADB, he said, would offer long-term fixed rate financing for 15-20 years, which would reduce a borrower's risk and the cost of doing business.