"Those expecting lower US rates in the future may consider converting INR liabilities to floating-rate USD liabilities through currency swaps, or principal-only swaps, as a cost-reduction measure," Ashhish Vaidya, managing director and treasurer, global financial markets at DBS Bank India, said.
Banks and foreign exchange advisors are suggesting clients use the 2-year tenure for the currency swap because it is offering the highest interest rate saving currently, the bankers said.
The US secured overnight financing rate (SOFR), a benchmark rate for dollar-denominated derivatives, has been declining in anticipation of the rate cut, with the 2-year SOFR down 35 bps so far in September and 120 bps on the quarter.
In contrast, India's 2-year Mumbai Interbank Forward Offered Rate is down just 20 bps in September and 74 bps on the quarter.
The widened US-India rate spread offers companies a larger margin of safety when converting rupee borrowings into dollar loans via currency swaps.
Currency swaps not risk-free
Currency swaps, while saving companies on interest costs, can expose them to foreign exchange risk, potentially negating interest savings and leaving the firm at a disadvantage if the rupee depreciates significantly by the time the swap is reversed.
Analysts say that the rupee's low volatility fosters corporate confidence in these trades.
Companies that have a natural hedge though dollar-denominated receivables can also mitigate a part of the currency risk.
"Corporates who have strong risk management framework or a natural hedge would be more suited to do such INR to USD swaps," Akshay Kumar, head of global markets India at BNP Paribas said.