India’s largest mortgage financier used an unusual trade to hedge some of its borrowings against interest rate volatility as it sought to expand its range of tools to manage risk, according to people familiar with the matter.

Housing Development Finance Corp., the nation’s biggest rupee-bond issuer this year, used a so-called total return swap to hedge rate risks on a issuance which closed last month, the people said, asking not to be identified discussing private arrangements. The lender had been primarily using overnight-index swaps before, they said.

The switch in hedging tools comes as are buffeted by surging policy rates, with the having hiked by 140 basis points since May to tackle . The central bank said last week that it will do “whatever it takes” to bring down price pressures, though some traders had expected it to tone down its hawkishness.


Under the interest-rate derivative contract, banks bought easily tradable sovereign bonds on behalf of the Mumbai-based financier on their treasury books, and would pay the overnight Mibor rate and a spread to the lenders, the people said. The spread acted like fees that paid to the banks which had taken a bond position for the financier.

A representative for declined to comment. The lender’s dependence on overnight-index swaps for managing rate risks had allowed traders to make bets in the market to factor in HDFC’s upcoming hedges whenever it raised money, making it costlier for the financier to buy protection, the people said.

The contract is called a total return swap because it allows the receiver to get returns on the underlying asset, in this case sovereign bonds, without having to fund the assets on its balance sheet.

With more than 40 per cent of the financier’s $66 billion borrowings coming from securities, managing the possible yield mismatch between the variable-rate loans it offers and the fixed rates at which it borrows is vital for HDFC. The swap agreement makes the liability and borrowing variable for HDFC, thereby protecting its lending margins.

That would help should policy rates drop over the duration of HDFC’s bonds. It’s unclear which bond the mortgage financier had hedged the rate risks on.

HDFC last month raised a combined 181.1 billion rupees ($2.3 billion) through three offerings. Of the total, 40 billion rupees was raised through notes due in March 2024 at 7.28 per cent coupon, 31.11 billion rupees via bonds maturing in June 2027 at 7.77 per cent and the remainder through a jumbo 10-year offering at 8 per cent.

Not all in India use the total return swap to hedge their interest-rate risk. That’s because some aren’t in the lending business, and so there is no need to hedge risk, and also no other shadow financier in the nation has a balance sheet that’s close to HDFC’s in size.

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