[ad_1]
The Reserve Bank of India (RBI) has decided to close its swap facility for foreign currency non-resident (bank), better known as FCNR(B), deposits one month ahead of schedule as inflows have risen rapidly, with banks already mobilising $52.3 billion under the scheme by August 13. The move comes just about a week after RBI Governor Sanjay Malhotra said there was no proposal to withdraw the scheme as of August 5.
The early closure suggests the RBI believes it has raised sufficient foreign currency to meet its balance-sheet and foreign-exchange requirements, reducing the need to take on further liabilities. From the week-ended July 3, foreign-exchange reserves have risen by over $40 billion. In the initial weeks after the launch of the swap window on June 8, forex reserves had swung between gains and losses.
In a press release on Friday, the RBI said the facility will now be available only for FCNR(B) deposits mobilised till August 31, against the original deadline of September 30. Banks can avail of swaps under the facility with the RBI until September 11. The RBI is bearing the full hedging cost under the scheme, enabling lenders to offer attractive rates to depositors.
The scheme for external commercial borrowings (ECBs) and overseas foreign currency borrowings (OFCBs) will continue until December 31, 2026, as previously announced.
On the probability of an early closure of the FCNR(B) facility, during the monetary policy press conference on August 5, Malhotra had said: “We have got robust flows… And we do hope to get good, healthy flows, going forward. As of now, there is no proposal under consideration to close the scheme prematurely.”
According to RBI data, foreign-exchange inflows under the facility stood at $56.85 billion as of August 13. FCNR(B) deposits accounted for the bulk at $52.3 billion, followed by OFCBs at $2.81 billion and ECBs at $1.74 billion.
“The broad reason for closing the swap window early is that the RBI appears to have mobilised deposits much faster than it had expected,” said Madhavi Arora, chief economist at Emkay Global Financial Services. “Its assessment of the requirement for dollars may also have changed as the inflows came in. Once the target has been achieved earlier than anticipated, there is little point in raising more money than is required and keeping those liabilities on the books.”
When the scheme was announced, many expected inflows to pick up in August and September, as they had under a similar scheme in 2013. However, the RBI clarified the leverage issue as early as the last week of June, which helped drive healthy deposit flows from July.
The FCNR(B) swap facility was announced on June 5 and operationalised on June 8. It allowed banks to mobilise fresh FCNR(B) deposits with a tenor of three to five years and swap the dollar inflows with the RBI at the prevailing spot rate.
“Whatever target the RBI may have had, it appears to have been achieved comfortably. The central bank is likely to have received excess dollars. The issue, however, is that these inflows will also add to surplus liquidity in the system. Given the amount of dollars that have come in, it appears sufficient to meet the balance sheet and forex requirements,” said Madan Sabnavis, chief economist at Bank of Baroda.
According to RBI data, deposits in the Indian banking system reached ~269.4 trillion as of July 31, 2026. “Based on the data available with the regulator, a considered decision would have been taken to close the swap window at this point. It is not possible to arrive at such a decision based on any single set of data from the banker or depositor perspective. The regulator has the entire gamut of data and would have taken the call based on a holistic assessment,” said a senior executive at a state-owned bank.
The latest reserve data also show the scale of the recent increase. Forex reserves are at their highest level since the week ended March 13. Forex reserves had reached a record $728.49 billion in the week ended February 27 before declining as the RBI sold dollars intermittently to curb excessive volatility in the rupee. This month, the central bank has resumed dollar purchases amid sustained foreign-exchange inflows, helping rebuild its reserves.
[ad_2]
Source link