Eurodollar

A misleading name for a global market

Eurodollars have nothing to do with Europe or the euro currency. The term simply means US dollars deposited in banks outside the United States, whether in London, Singapore, Tokyo or, increasingly, India's GIFT City. The "Euro" prefix dates to the Cold War, when the Soviet Union and others parked dollars in European banks to keep them beyond US jurisdiction.

These offshore dollars escape some US banking regulations, which historically let banks offer better rates and pricing. Over decades the eurodollar market grew into one of the largest pools of capital on earth, the plumbing through which global trade and lending in dollars actually flows.

Why it matters globally

Because so much of world trade, India's oil imports, exporters' receipts, corporate borrowing, is priced and settled in dollars, the cost of borrowing eurodollars is a key global interest rate. For decades this was reflected in LIBOR; after its scandals, the market has shifted to SOFR (Secured Overnight Financing Rate) as the benchmark.

When offshore dollar funding gets tight or expensive, the strain ripples worldwide, hurting emerging-market borrowers and currencies, including the rupee.

The India connection

Indian companies tap this market when they raise foreign-currency loans (ECBs) or issue dollar bonds; their cost is tied to SOFR plus a spread. The RBI watches global dollar conditions closely because they affect capital flows, the rupee and India's foreign-exchange reserves. GIFT City is, in effect, India building its own slice of the offshore dollar market onshore, letting banks there take dollar deposits and lend in dollars. For Indian investors, the eurodollar market is invisible but ever-present, shaping the global cost of money that ultimately reaches Indian shores. When offshore dollars turn scarce, as they did in past global crises, the rupee and Indian markets feel it quickly, which is why this obscure-sounding market deserves a place in any investor's mental map.