Pakistan raises record $3 billion through dual-tranche Eurobond

[c14-Isotope]

Actually, there are two components that make it possible. One is the leverage that is being offered to investors, but the more important part is that the bank is able to lend the entire leveraged up gross amount to Indian borrowers at high INR interest rates, without taking much FX risk. Without the second component , the banks will lose money since they are giving the USD loan at a lower interest rate than what they are paying for the USD deposit. That is the real magic.
Obviously, it is not free, and the central bank is taking on a lot of FX risk. Ultimately , it will come down to how well that risk is managed over the next five years when the deposits come due.

RBI is effectively absorbing all the FX hedging cost on the principal amount through the swap. Biggest risk to banks is interest dollars mainly.
RBI may have some valuation risk, but I would not count it too much since it's a swap & there is a match between $ asset and $ obligation. Much more meaningful macro risk to RBI would be monetary policy/liquidity now that the banks are flush with rupees.

 

[Owaiz]

RBI is effectively absorbing all the FX hedging cost on the principal amount through the swap. Biggest risk to banks is interest dollars mainly.
RBI may have some valuation risk, but I would not count it too much since it's a swap & there is a match between $ asset and $ obligation. Much more meaningful macro risk to RBI would be monetary policy/liquidity now that the banks are flush with rupees.

Dude, there is no free lunch. A swap just means there is an exchange of cash flows with different risk profiles. It doesn't mean the risk is eliminated. In fact, some of the biggest financial disasters have been amplified by the use of swaps. Fully hedging the risk with maturity matched 3 -5 year fx forwards will be very expensive. I doubt the central bank willl pay that cost upfront. Shorter dated forwards and spot hedging through normal FX flows will be cheaper, but will carry timing mismatch risk.

It may still work out but it is risky and it will require a combination of skill and luck to keep hedging costs reasonable.

 

[c14-Isotope]

Dude, there is no free lunch. A swap just means there is an exchange of cash flows with different risk profiles. It doesn't mean the risk is eliminated. In fact, some of the biggest financial disasters have been amplified by the use of swaps. Fully hedging the risk with maturity matched 3 -5 year fx forwards will be very expensive. I doubt the central bank willl pay that cost upfront. Shorter dated forwards and spot hedging through normal FX flows will be cheaper, but will carry timing mismatch risk.

It may still work out but it is risky and it will require a combination of skill and luck to keep hedging costs reasonable.

There is no free lunch here as well, risk to banks by interest dollars and risk to RBI through opportunity costs & monetary policy (assuming rupee will depreciate, infact it will definitely depreciate). But RBI obligation is fixed and as per the swap terms it will likely get less rupees at the time of maturity. What else is the issue?
It's basically a INR-USD swap where RBI will absorb the FX hedge on the principal amount and get less rupees back after 5 years.