Far exceeding the expectations of bankers and policymakers, the Reserve Bank of India’s special US dollar-rupee forex swap facility has drawn provisional foreign exchange inflows of $136.377 billion through August 31.
The surge in inflows have come through Foreign Currency Non-Resident (Bank), or FCNR(B), deposits, Overseas Foreign Currency Borrowings (OFCBs) and External Commercial Borrowings (ECBs), according to data reported by authorised dealer banks.
FCNR(B) deposits accounted for the overwhelming share of the mobilisation at $127.226 billion. OFCBs contributed $5.260 billion, while ECBs brought in $3.891 billion, the RBI said.
The figures are provisional and subject to final reporting, accounting and reconciliation.
Analysts and bankers had expected inflows of $70-$80 billion when the scheme was introduced, and the large scale of the inflows marks a substantial response to the concessional swap facility introduced by the RBI on June 8. The facility was designed to encourage fresh foreign-currency inflows and support domestic liquidity at a time when the rupee and India’s foreign-exchange reserves were under pressure amid global uncertainties, trade tensions and Middle East conflict.
The RBI had initially opened the FCNR(B) swap window until September 30. However, following what it described as an “encouraging response”, it announced on August 14 that the window for fresh FCNR(B) deposits would close early on August 31. The swap of deposits already mobilised under the facility could, however, be undertaken with the RBI until September 11.
The concessional facilities for ECBs and OFCBs remain open until December 31, 2026.
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The latest numbers indicate how sharply mobilisation accelerated during August.
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.
FCNR(B) deposits emerged as the principal channel because the RBI effectively absorbed the currency-hedging cost for banks through the swap arrangement. The move made it more attractive for banks to mobilise foreign currency deposits from non-resident Indians and other eligible depositors.
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The strong response was also helped by higher interest rates offered by banks.
Several banks were offering FCNR(B) rates of around 6-6.5%, while some smaller banks were offering rates of about 7-7.5%. The rates provided an incentive for overseas investors to bring funds into the banking system.
The country’s foreign exchange reserves rose to a record $729.33 billion as on August 21, with the concessional FCNR(B) swap window contributing to the increase. The previous record was $728.49 billion as of February 27.
The swap facility was part of a broader package aimed at strengthening the rupee and improving foreign exchange liquidity. The RBI’s intervention revived a tool used during the 2013 period of pressure on the rupee, when a similar scheme helped mobilise about $ 34 billion.
Cost of swaps
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The FCNR mobilisation, however, has also raised questions over the cost of the concessional swaps.
SBI Research estimated the potential cost to the RBI of hedging the deposits could be around 15% of the amount raised. At the same time, the Finance Ministry has said the FCNR(B) window achieved its objective ahead of schedule, with the external buffers strengthened through the measures.
With the FCNR(B) mobilisation window now closed and the ECB and OFCB facilities continuing until December 31, the final accounting of the $136.377 billion inflow will provide a clearer picture of the scale and composition of foreign currency resources raised through the RBI’s special swap programme.
Unlike the 2013 scheme, which addressed a balance-of-payments crisis, the current initiative comes from a position of stronger macroeconomic fundamentals and higher forex reserves.
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“These inflows will provide banks with stable medium-term funding, improve liquidity, lower funding costs, and ease credit-deposit ratio pressures. However, FCNR(B) deposits are expected to remain only around 3% of total deposits, limiting their structural impact on bank funding,” CareEdge Ratings said.
Unlike 2013, the rupee has not appreciated significantly due to global uncertainties, geopolitical risks and weaker capital flow dynamics. The rupee closed at 94.97 against the dollar on Wednesday.
The announcement by the US Federal Reserve regarding the tapering of quantitative easing, the “Taper Tantrum,” triggered large capital outflows from emerging markets, resulting in a significant depreciation of the Indian rupee from around Rs 54 per dollar in May 2013 to a record low of nearly 68.85 in August 2013.
The broader swap facility, which included fresh FCNR(B) deposits as well as overseas borrowings by banks, attracted around $34.3 billion in total foreign currency inflows. These inflows substantially strengthened India’s foreign exchange reserves, improved import cover, eased pressure on the rupee, reduced exchange-rate volatility and restored investor confidence in India’s external sector.
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Overall, while the scheme may not deliver the dramatic currency appreciation or reserve accumulation witnessed in 2013, it remains a prudent policy tool for strengthening external financing conditions, boosting market confidence, and reinforcing macroeconomic stability amid prevailing global uncertainties and the RBI’s existing foreign exchange management commitments, CareEdge said.
