RBI’s forex swap window draws $72.85 billion inflows till August 21

The swaps against FCNR(B) deposits mobilised under the facility, however, can be undertaken with the RBI till September 11.

With the dollar-rupee stabilising in the 95-handle, portfolio flows gradually returning, and the various funding windows likely having raised around $70 billion-$75 billion in aggregate, equivalent to 10-12% of prevailing foreign exchange reserves, the urgency for policymakers to maintain extraordinary support measures has diminished significantly, said Radhika Rao, ED and Senior Economist, DBS Bank.

“The scale of hedging cost (borne by the central bank) was unlikely to have been a binding factor, with funds raised to-date deemed to be sufficient to prop the BOP back to a position of strength,” Rao said.

The RBI may have closed the swap facility prematurely, with some suggesting that the high cost of hedging these deposits may have played a role. The potential cost to the RBI could be around 15% of the amount raised. Assuming $70 billion is raised through the facility, this would translate into a cost of around $10.5 billion, according to an SBI Research report.

The RBI had introduced the special USD-rupee concessional swap facility on June 8 to encourage fresh foreign currency inflows through FCNR(B) deposits as well as eligible OFCB and ECB inflows. The facility was aimed at strengthening domestic liquidity and providing support to the foreign exchange market at a time when the rupee and the country’s forex reserves had come under pressure.

The latest inflow data shows that FCNR(B) deposits have emerged as the principal channel through which banks have raised foreign currency under the scheme.

The sharp increase in the reported mobilisation since then reflects continued interest in the concessional swap facility.

The RBI offers banks concessional swap arrangements against eligible foreign currency inflows, enabling them to access rupee liquidity while bringing foreign currency into the domestic financial system.

Major banks are offering FCNR rates of around 6%-6.5%, while some newer, smaller banks are offering about 7%–7.50%. These rates remain above the 5-year US Treasury yield of around 4.2%, providing sufficient incentive for deposit mobilisation.

FCNR(B) deposits are fixed-term deposits that can be maintained by non-resident Indians, Overseas Citizens of India and Persons of Indian Origin in designated foreign currencies. Unlike ordinary rupee deposits, these deposits allow overseas Indians to retain their savings in currencies such as the US dollar, pound sterling, euro, Japanese yen, Australian dollar and Canadian dollar.

Interest earned on FCNR(B) deposits is exempt from income tax in India as long as the depositor qualifies as a non-resident under Indian tax laws.

The large mobilisation through FCNR(B) deposits also points to strong participation by overseas Indians and provides banks with foreign currency resources. The RBI’s move came against the backdrop of pressure on the rupee and foreign exchange reserves arising from the West Asia conflict and higher crude oil prices.

However, questions have also been raised about how much of the reported mobilisation represents genuinely new foreign currency entering the system.

The latest figures also indicate that the initial expectations for the scheme have been surpassed. With the facility drawing $72.85 billion by August 21, the mobilisation is already close to the $70-80 billion inflow range that analysts had expected earlier.

India’s forex reserves rose by $9.90 billion to $ 716.90 billion during the week ended August 14.