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India Inc significantly reduced its reliance on external commercial borrowings (ECBs) during the fiscal year 2025-26, with total ECB volumes falling by 33% compared to the previous year, according to data and reports. The moderation reflects a combination of factors: favourable domestic interest rates following recent monetary policy easing by the Reserve Bank of India, and rising hedging costs that have made foreign-currency loans comparatively expensive.
The trend marks a notable pivot away from overseas debt markets, which had been a popular source of low-cost funds for Indian companies in prior years. As the RBI cut policy rates during FY26, domestic bank lending rates became more competitive, reducing the incentive for firms to seek external financing. Additionally, the cost of hedging currency risk on foreign loans—through forward contracts or swaps—has climbed, further eroding the cost advantage of ECBs.
Analysts and corporate treasurers suggest that the shift may persist if domestic liquidity remains supportive and hedging costs stay elevated. The data aligns with broader trends of moderating foreign borrowing and increased reliance on rupee-denominated credit, particularly from banks and domestic bond markets.
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Key Highlights
- ECB volumes dropped by approximately one-third in FY26, signaling a major realignment in corporate funding preferences.
- Domestic rate cuts played a central role: The RBI’s easing cycle lowered borrowing costs in India, making rupee loans more affordable relative to foreign-currency debt.
- Hedging costs rose sharply: The cost of protecting against currency fluctuations on ECB loans increased, reducing the net benefit of overseas borrowing.
- Bank credit growth picked up as companies turned to local lenders, supporting overall domestic lending activity.
- Sector-wide implications: The shift could affect India's external debt dynamics and the balance of payments, though the immediate impact appears manageable.
- Outlook uncertain: If the RBI continues to ease and global rates stabilise, domestic borrowing may remain preferred; but any reversal in rate differentials could revive ECB demand.
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Expert Insights
The 33% decline in ECB borrowings reflects a rational response to changing cost structures, say market observers. The combination of lower domestic rates and elevated hedging premiums has narrowed—or even inverted—the spread that once made ECBs cheaper. For CFOs, the decision now hinges on relative financing costs, currency risk appetite, and the need for long-term foreign currency exposure.
Looking ahead, the trajectory of ECB borrowing will likely depend on the pace of RBI rate cuts versus global central bank policies, as well as volatility in the rupee. If domestic rates remain soft and hedging stays expensive, Indian firms may continue to favour local bank credit or rupee bond issuances. Conversely, if global rates decline further while the RBI holds steady, ECBs could regain some appeal.
However, no definitive shift is guaranteed. The market is watching for signs of renewed ECB activity should hedging costs moderate. For now, the data suggests that India Inc is prioritising cost certainty and currency alignment, opting for domestic sources over complex cross-border structures. This trend may also reduce corporate exposure to external shocks, a positive for financial stability.
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