SBI, PNB, BoB drive strongest PSU bank rally in 2 months; what's behind the surge?

Banking stocks led a recovery on Dalal Street on Tuesday following two back-to-back sessions of losses, after the RBI shared operational details of a concessional foreign exchange (forex) swap facility linked to external commercial borrowings (ECB) and overseas foreign currency borrowings (OFCBs) aimed at attracting overseas capital inflows. PSU bank stocks led the rally across the financial services basket, with the Nifty Bank closing 2.1 per cent higher -- its biggest jump in two weeks (May 25). The Nifty PSU Bank surged 3.6 per cent while the Nifty Private Bank gained 1.6 per cent -- rising the most since April 8 and May 25, respectively.

SBI, Bank of Baroda, Punjab National Bank (PNB), RBL Bank and Federal Bank were at the forefront of the rally, gaining between 2.3 per cent and 5.5 per cent for the day. ICICI Bank rose 2.1 per cent while HDFC Bank -- the country's largest lender by mcap -- inched higher by 0.1 per cent.

The measures were widely seen as beneficial for commercial banks, with reduced hedging expenses expected to support foreign-currency borrowing and enhance access to global funding markets.

Under the swap facility, authorised dealer banks will be able to access a concessional window for fresh and renewed FCNR(B) deposits with maturities of 3-5 years until September 30. The window will be available for eligible overseas borrowings.

ECBs with a minimum maturity of three years and contracted until December 31 will be eligible. It will enable eligible entities to swap US dollar borrowings into rupees directly with the central bank, helping them manage forex exposure more efficiently.

The facility will be available daily until January 15, 2027.

Analysts say the move is expected to make hedging of overseas borrowings easier and cheaper for government-owned firms, reducing forex risk arising from fluctuations in the dollar-rupee exchange rate. The facility could also lower the overall cost of dollar funding, making it easier for PSUs to raise capital from foreign markets and diversify their funding sources.

The central bank has capped the maximum swap tenure at five years and fixed the swap rate at 1.5 per cent per annum. The USD-INR swap facility will be available only for US dollar-denominated borrowings. It will operate the facility on a daily basis and keep the window open until January 15, 2027.

How the rupee-dollar swap will work

The RBI's facility will effectively act as a low-cost currency hedge for eligible foreign borrowings. Normally, when a bank or PSU company raises money abroad in US dollars, it faces currency risk because the rupee may weaken by the time the loan is repaid. To protect against this risk, borrowers typically buy hedging contracts from the market, which can be expensive and increase the overall cost of funding.

Under the new arrangement, eligible entities can borrow dollars overseas and then swap those dollars into rupees directly with the RBI at the concessional rate. This will provide borrowers greater certainty over future currency costs while reducing their dependence on market-based hedging products.