A foreign currency loan can look remarkably attractive in a board presentation.

The headline interest rate is lower than the rate quoted by an Indian lender. The overseas parent or foreign bank is willing to provide a longer tenure. The repayment may begin after the project becomes operational. For a few minutes, external commercial borrowing appears to be the obvious answer.

Then the treasury team adds the cost of hedging. The tax team adds withholding tax. Transfer pricing reviews the interest rate and guarantee fee. The authorised dealer bank asks about the end use, maturity, lender eligibility and RBI reporting. The loan agreement introduces covenants, gross-up clauses and prepayment restrictions.

The cheap loan suddenly becomes much more complicated.

This question has returned to the boardroom after RBI’s foreign currency mobilisation measures attracted approximately USD 40.81 billion by the end of July 2026. Most of that amount came through Foreign Currency Non-Resident deposits, while smaller amounts were mobilised through a special swap facility supporting eligible external commercial borrowings and overseas borrowings by authorised dealer banks.

The headline signals strong foreign currency inflows into India. It does not mean every Indian company now has access to low-cost, RBI-hedged foreign borrowing.

For CFOs and treasury teams, the relevant question is not whether foreign money is available. It is whether an ECB remains commercially cheaper after currency protection, tax, compliance, fees and refinancing risk are taken into account.

What the USD 40.81 Billion Figure Actually Represents

RBI introduced a package of measures in June 2026 to attract longer-term foreign currency flows and support foreign exchange liquidity.

By 31 July, these measures had reportedly mobilised approximately USD 40.81 billion. Around USD 36.7 billion came through FCNR deposits, approximately USD 1.5 billion through the special ECB swap facility, and around USD 2.57 billion through overseas foreign currency borrowings raised by authorised dealer banks.

The composition is important.

Nearly 90% of the inflows came through deposits mobilised by banks from non-resident customers. The amount raised through the special ECB facility was comparatively modest. The figure should therefore not be read as evidence of a USD 40 billion corporate borrowing boom.

The policy measure nevertheless matters for corporate finance. It demonstrates RBI’s willingness to use concessional currency swaps to encourage long-term foreign funding during a period of pressure on the rupee and global capital flows.

It also creates a useful reference point for evaluating why companies avoid foreign borrowing even when the overseas coupon appears attractive. In many cases, the obstacle is not access to credit. It is the cost of eliminating foreign exchange risk.

The Special RBI Swap Is Valuable, but Narrowly Targeted

RBI’s June 2026 facility allows eligible external commercial borrowings to be swapped from US dollars into rupees at a fixed swap premium of 1.5% per annum, compounded half-yearly.

The maximum swap period is linked to the repayment schedule of the underlying borrowing and is capped at five years. The qualifying ECB must generally have an average maturity of at least three years and be drawn during the prescribed window ending 31 December 2026.

This is an unusually favourable hedge when compared with what a corporate borrower may otherwise pay in the market.

However, the facility is not available to all Indian companies.

For ECBs, it is restricted to qualifying public sector undertakings. Broadly, these include entities majority-owned by the Central or state governments and specified statutory PSUs controlled by government. Authorised dealer banks can separately use the facility for qualifying overseas foreign currency borrowings.

The swap is also unavailable for ECBs containing embedded options or borrowings raised for refinancing or repayment of existing ECBs. Although the underlying loan can be denominated in another permitted currency, the swap entered with RBI is conducted in US dollars.

A privately owned manufacturer, technology company or startup cannot assume that it can hedge its ECB with RBI at 1.5%. Such borrowers must generally rely on commercial hedging instruments or demonstrate a genuine natural hedge.

This distinction should be stated clearly in any board proposal. The policy has improved the foreign funding environment, but its most concessional component is not a general corporate subsidy.

What an ECB Means Under FEMA

An ECB is a commercial borrowing raised by an eligible Indian resident entity from a recognised non-resident lender in accordance with the FEMA borrowing framework.

The expression can cover foreign currency bank loans, bonds and other permitted commercial debt instruments. It is not simply an ordinary loan agreement with a foreign party. The transaction must satisfy the regulatory conditions applicable to the borrower, lender, currency, maturity, cost and end use.

Entities eligible to receive foreign direct investment are generally eligible ECB borrowers, along with certain specifically permitted institutions and units. The recognised lender must also satisfy the prescribed conditions, including the applicable jurisdictional and regulatory requirements.

Under the ordinary automatic route, an eligible borrower may generally raise ECB up to USD 750 million or its equivalent in a financial year, subject to the framework. Larger or otherwise non-conforming transactions may require prior approval.

The minimum average maturity is generally three years, although special categories and end uses can attract different conditions. The all-in-cost must remain within RBI’s applicable ceiling.

The permitted end use must be established before drawdown. ECB proceeds cannot be deployed freely merely because the lender agrees with the commercial purpose. Restrictions continue to apply to activities such as specified real-estate activity and capital-market investment, along with other prohibited or conditionally permitted uses under the framework.

The loan should therefore be designed around the intended use of funds, rather than the business first borrowing and deciding later where to deploy the money.

The True Landed Cost Is More Than the Coupon

The interest rate quoted by the foreign lender is only the first component of ECB cost.

A proper comparison should include the benchmark rate, lender spread, arrangement fee, agency fee, commitment fee on undrawn amounts, guarantee fee, legal and documentation costs, authorised dealer charges, withholding tax and the cost of currency and interest-rate hedging.

The tax deductibility of the expenditure and any restriction on interest deduction must also be considered. Where the agreement requires the Indian borrower to gross up the interest so that the lender receives a fixed net amount, withholding tax becomes an additional borrowing cost rather than merely a collection mechanism.

Consider a hypothetical Indian company evaluating a five-year foreign currency loan.

The overseas borrowing carries an effective coupon of 7%. Arrangement and annualised transaction costs add 0.40%. A commercial currency hedge costs 3.25%. Withholding tax gross-up and other recurring costs add an economic equivalent of another 0.60%.

The effective pre-tax cost is now approximately 11.25%, even before considering prepayment costs, covenant restrictions or refinancing risk.

If a comparable rupee loan is available at 10.75%, the foreign borrowing is not cheaper merely because the lender’s presentation begins with 7%.

The numbers in each transaction will differ. The principle does not: compare total rupee cash outflow over the full tenure, not the foreign currency coupon on the signing date.

Hedging Changes the Risk, Not the Credit Economics

A full currency hedge converts uncertain exchange movements into a more predictable cost. It does not eliminate the other risks associated with the borrowing.

The borrower still faces interest-rate exposure where the loan carries a floating benchmark. It remains subject to financial covenants, repayment obligations and default provisions. The debt may need to be refinanced at maturity. A project delay can create a mismatch between cash generation and scheduled repayments.

The special RBI swap reduces currency risk for qualifying PSUs at a concessional cost. It does not protect them against deterioration in operating cash flow, credit quality or the ability to service the loan.

Private borrowers sometimes choose to remain partly unhedged because the hedge appears expensive. That decision should not be based on a view that the rupee is unlikely to depreciate beyond a particular level.

An unhedged ECB creates a leveraged foreign exchange exposure. A 10% depreciation increases the rupee value of both interest and principal obligations. The resulting impact can affect profit, debt ratios, covenant compliance and liquidity at the same time.

When a natural hedge can work

A company may have a natural hedge where it earns predictable revenue in the same currency as its debt and can use those receipts to service the borrowing.

An Indian exporter receiving regular US dollar revenue may therefore be better positioned to borrow in dollars than a domestic infrastructure company earning only rupees.

But the hedge must be tested carefully. Dollar revenue received over ten years does not automatically hedge a bullet repayment due after three years. Revenue denominated in euros does not perfectly offset a dollar loan. Export receipts that are volatile, customer-dependent or required for operating expenses may not be fully available for debt service.

A natural hedge is a cash-flow relationship, not an accounting label.

Withholding Tax Can Materially Change the Cost

Interest paid by an Indian borrower to a foreign lender is ordinarily taxable in India, subject to domestic law and the relevant tax treaty.

For a fresh foreign currency borrowing in 2026, the borrower should not assume that the historical 5% concessional rate available for certain older categories of qualifying foreign currency borrowings and bonds will apply. Those specific concessions were linked to instruments or agreements entered into before prescribed dates.

Outside a specific concession, the domestic tax rate on qualifying foreign currency interest is generally 20%, before surcharge and cess. A tax treaty may provide a lower rate where the lender is eligible for treaty relief and satisfies the documentation, beneficial ownership and other relevant conditions.

The contractual allocation of this tax matters.

If interest of USD 1 million is subject to withholding and the lender accepts the net payment after tax, the cost is economically contained in the agreed coupon. If the agreement promises the lender USD 1 million net of Indian taxes, the Indian borrower must gross up the payment. The effective interest cost rises.

The treasury model should therefore use the post-gross-up rate, not the treaty rate in isolation.

Related-Party ECBs Need Transfer Pricing Support

An overseas parent may be willing to lend when an independent bank is not. That commercial flexibility does not remove the arm’s-length requirement.

Where the lender is an associated enterprise, Indian transfer pricing rules require the financing terms to reflect what independent parties would have agreed in comparable circumstances.

The analysis should consider the currency, borrower credit profile, tenure, security, repayment structure, subordination, use of funds, market conditions and any explicit guarantee. The correct arm’s-length rate is not automatically the parent’s cost of funds plus an arbitrary margin.

A guarantee from the overseas parent may also require a separate transfer pricing analysis. The group should assess whether the guarantee provides a measurable economic benefit, whether it increases the amount borrowed or merely reflects implicit group support, and what independent parties would charge for a comparable arrangement.

The loan agreement, benchmarking analysis, Form 48 reporting and accounting treatment should all reflect the same financing structure.

Thin Capitalisation Can Restrict the Interest Deduction

Section 177 of the Income-tax Act, 2025 limits the deduction of interest in specified related-party debt arrangements.

The provision can apply where an Indian company or Indian permanent establishment pays interest or similar expenditure exceeding INR 1 crore on debt issued by a non-resident associated enterprise.

It can also apply where an independent lender provides the debt but the associated enterprise gives an explicit or implicit guarantee or deposits corresponding funds with that lender.

Broadly, the disallowance is linked to interest exceeding 30% of the borrower’s EBITDA, subject to the statutory computation and exclusions. Disallowed interest may be carried forward for up to eight tax years.

This means that an arm’s-length interest rate does not guarantee a full tax deduction.

Transfer pricing asks whether the price is arm’s length. Thin-capitalisation rules separately ask whether the amount of interest may be deducted in the relevant year. Both analyses are required.

FEMA Compliance Begins Before Drawdown

An eligible ECB should be implemented through the designated authorised dealer bank.

The borrower must file the prescribed Form ECB and obtain the Loan Registration Number before drawing the funds. Borrowing first and regularising the registration later is not an acceptable treasury process.

Actual transactions, including drawdowns, interest payments and repayments, must be reported through the monthly Form ECB-2 return. The return is required within seven working days from the close of the relevant month. Changes in ECB parameters must also be reported within the prescribed timeline.

The finance team should maintain a live compliance file containing the executed facility agreement, lender eligibility documents, end-use analysis, maturity computation, all-in-cost working, board approvals, LRN, remittance evidence, hedge documentation, tax certificates and monthly reporting records.

Responsibility should not be left entirely with the bank. The authorised dealer is an important gatekeeper, but the borrower remains responsible for ensuring that the borrowing and utilisation comply with FEMA.

When Foreign Currency Borrowing Makes Commercial Sense

ECB is often well suited to an exporter with stable foreign currency receipts, a company purchasing imported equipment that generates long-term revenue, or a business requiring funding that matches the life of an overseas-facing project.

It can also be attractive where an overseas parent is prepared to provide patient capital on commercially supportable terms, particularly where the Indian entity is still developing a domestic credit history.

For qualifying PSUs, the current RBI swap facility can materially improve the economics by providing a predictable and concessional hedge for eligible borrowings.

Foreign borrowing is generally less attractive where the company earns only rupee revenue, has uncertain cash flows, requires a short repayment period or expects to refinance rather than repay from operations. It also becomes less attractive where the lender insists on extensive tax gross-up, restrictive covenants or expensive prepayment terms.

The correct decision depends on the full funding profile, not a generic preference for foreign or domestic debt.

Conclusion: Borrow in the Currency of the Business, Not the Presentation

RBI’s USD 40.81 billion inflow mobilisation shows that policy support can attract significant foreign currency into India. It also shows the value of reducing hedging friction when the objective is to encourage longer-term external funding.

But the special 1.5% swap facility is targeted, and most private corporate borrowers must still manage foreign exchange exposure through commercial hedging or natural currency cash flows.

For CFOs, the central discipline is to calculate the true landed cost. The analysis must include hedging, withholding tax, gross-up, transfer pricing, thin capitalisation, fees, FEMA conditions and repayment risk.

A foreign currency loan is genuinely cheaper only when it remains cheaper after all of those elements are included.

The best borrowing currency is usually the currency in which the business can reliably generate the cash needed to repay it.

Anything else is not merely a funding decision. It is a currency position placed on the company’s balance sheet.