Buyer's credit, fully hedged — getting the all-in cost to 6.11%

Buyer's credit is widely used as a cheaper funding source. Buyer's credit taken because the dollar is expensive, and then timed inside the credit window, is a different thing — a deliberate cost decision with a defined floor. When USD/INR was at an all-time high, I funded imports with buyer's credit instead of the domestic line at SOFR (3.48%) + 70 bps, took a 120-day tenor, and used the window: rather than locking the forward on day one, I waited for the overextended dollar to pull back — which it did around month two — and booked the cover there. The all-in, including the foreign bank's commission and every other line, came to 6.11% in rupee terms, against a ~9% domestic alternative.

This piece is about that funding-and-hedge structure. The FX rate spread inside the forward — the IBR negotiation — is a separate skill I cover here.

Why buyer's credit beats domestic borrowing

For an import payable, an Indian importer has three real choices:

1. Pay cash from working capital — fast, but ties up rupees.
2. Domestic WCDL or OD — convenient, at roughly a 9% rupee rate.
3. Buyer's credit — short-term foreign-currency financing from an overseas bank, repaid at the end of the tenor, fully hedged.

Option 3 is the cheapest if you compute the all-in cost honestly and manage the payable to a floor. And with the dollar at a record high, the asymmetry actually favours patience: a stretched spot has more room to fall than to rise over a few months, so — provided the downside is capped — the window of the credit becomes an asset, not just a risk.

The all-in cost — every line, to 6.11%

The number that matters is not the headline offshore rate. It is the full stack, annualised into a rupee-equivalent cost. The components:

• Offshore benchmark (Term SOFR) for the tenor — the floating anchor.
• The lender spread — the overseas bank's margin for extending the credit (here, 70 bps).
• Guarantee / BG commission — your bank's clip for the SBLC or guarantee the overseas lender lends against. The line most people forget.
• CILE, SWIFT and processing fees — charges in lieu of exchange and flat bank fees. Individually small, but they belong in the all-in.
• Forward premium — the cost of hedging the USD payable back into rupees for the maturity date. This is the line that pulls the dollar rate back toward the rupee rate.
• Withholding tax on interest to the overseas lender — confirm DTAA applicability and gross up if needed.

The headline "SOFR + spread" is only the dollar funding rate — about 4.18%. The number that actually matters is everything above, loaded into a rupee-equivalent and annualised. On a $2M drawdown that came to 6.11%:

Timing the forward inside the window

The naive playbook says lock the forward on day one. I don't — not when spot is at an extreme and I'm holding a 120-day window. Here is what I actually run:

1. Draw the buyer's credit in USD to pay the supplier, taking the full 120-day tenor at SOFR (3.48%) + 70 bps. The window is now mine to use.
2. Hold the cover and watch — within a defined floor. With the dollar overextended, I waited rather than locking immediately. Around month two the dollar pulled back, and I booked the forward there, at a materially better rate than day-one spot.
3. Lock and compute. Once the forward was booked, the all-in was fixed at 6.11% — a known number for the remaining tenor.

This only works because the wait is bounded on both sides. Read on for the two rules that turn it from a gamble into a process.

The discipline — a floor and a window, not blind hope

Leaving a payable open and "hoping" is speculation. What I run is different, because two hard rules cap the downside:

1. A floor. Before I hold anything open, I fix a worst-case rate at which I lock no matter what — set so the all-in can never exceed the ~9% domestic alternative I'd otherwise pay. The downside is therefore capped at "no worse than borrowing rupees." Everything below the floor is upside.
2. A bounded window. The position is never open-ended. The credit tenor is the hard stop; by maturity it is locked regardless of where spot is. There is no scenario where the exposure runs naked past the repayment date.

Inside those guardrails, the only live variable is when to book the cover — and that is an informed macro read (a stretched dollar reverting), not a coin toss. I've run this across multiple cycles and it has consistently come in below the floor. The one exception is open right now: a position I'm carrying into the current US–Iran tension, where the view hasn't played out and I expect to lock at the floor — around 9%. No gain on that one, but no loss versus domestic either. That is the floor doing exactly its job.

Hedging at an extreme isn't "lock on day one" or "wait and pray." It's defining the worst case you'll accept, bounding the time you'll wait, and then using your read of the market inside those limits. The floor is what makes the patience disciplined.

What can go wrong

1. No floor. Holding open without a pre-committed worst-case lock is how a timing view becomes a loss. The floor is non-negotiable — set it before you wait, and honour it even when you still believe spot will come back.
2. Tenor mismatch. If the credit matures on day 120 but the forward is for day 115, you carry five days of naked exposure. Trivial to fix, easy to forget.
3. Auto-rolling the credit without re-hedging. If the bill rolls, the original cover expires and the new exposure is open. Re-set the floor and the window on every roll.

The outcome

On this run, timing the cover inside the window brought the all-in to 6.11% against ~9% domestic. Across both organisations, and over $2M+ of buyer's credit drawn, the same approach — bounded, floored, and timed — added up to roughly ₹1.45 Cr in forex gain over multiple cycles, with a near-unbroken hit rate and one position currently sitting at the ~9% floor by design. The funding choice and the rate skill — the IBR spread, negotiated separately — compound on top of that.