External buffers fortified with ‘maximum cost-efficiency’: Finance Ministry on forex swap windows

The swap facility for Overseas Foreign Currency Borrowings and External Commercial Borrowings will remain open till December 31, as announced originally.

The finance ministry said the FCNR(B) swap window had “achieved its objective ahead of schedule”.

“This spectacular response is a testament to the fact the Indian economy, under the leadership of Prime Minister Narendra Modi, is moving from strength to strength despite unprecedented challenges in the global financial landscape,” it added.

The ministry’s comments come after speculation that the RBI had closed the window early due to its high cost. As per the scheme, the RBI is set to bear the entire hedging cost of the FCNR(B) deposits.

However, others have argued that the cost of the scheme – estimated by some to be around $10 billion over a period of five years, assuming $70 billion is raised in total – is unlikely to have been a factor in the decision to close the facility early.

Announced on June 5 to help boost foreign inflows and stabilise the rupee’s exchange rate and bridge the shortfall in the country’s Balance of Payments deficit, the FCNR(B) swap facility was first used in late 2013 to counter the capital outflows caused by speculation that the US Federal Reserve was set to tighten its monetary policy.

However, unlike 2013, the rupee has not appreciated much this time around and continues to trade in the 95-96-per-dollar range, having nearly breached 97 in mid-May. Economists reason this is due to the vastly different global situation now, with interest rates in developed economies much higher and multiple geopolitical conflicts in play.

“Additionally, RBI’s large forward forex obligations may constrain any visible rise in reserves. Overall, the scheme should be viewed primarily as a liquidity and stability measure rather than a driver of sharp currency appreciation or reserve accumulation,” CareEdge Ratings said in a note on August 14.

The RBI’s short forward book – which indicates the extent to which the central bank has sold dollars in the forwards market – stood at a record of $106 billion at the end of May. In June, it trimmed it down somewhat to $103 billion.

Meanwhile, the foreign exchange reserves stood at $717 billion as on August 14, up $35 billion from before the launch of the three swap windows.