Massive Inflow Surge Forces RBI to Close FCNR(B) Swap Window Early

Massive Inflow Surge Forces RBI to Close FCNR(B) Swap Window Early​

The Reserve Bank of India (RBI) has significantly advanced the deadline for mobilizing foreign currency non-resident (bank) deposits (FCNR(B)), citing overwhelmingly high foreign currency inflows. Originally set for September 30, the facility's closure has been moved up to August 31, a decisive move driven by the strong market response and robust capital inflow witnessed since the scheme's launch on June 8.

The RBI reported that $52.30 billion was received through FCNR(B) deposits as of August 13. This figure reflects an extremely encouraging response to the swap facility, making early closure a pragmatic decision for managing foreign exchange reserves and liquidity objectives. Banks using this mechanism can avail the swap with the RBI under a zero-cost hedging facility until September 11.

Driving Foreign Exchange Reserve Strength​

The special measures introduced by the RBI have collectively generated substantial foreign currency inflows. As of August 13, total foreign inflows from these measures reached $56.84 billion, a marked increase from $40.81 billion reported just one month earlier on July 31.

FCNR(B) deposits are the primary driver behind this impressive growth, accounting for $52.30 billion of the total inflow. In contrast, inflows generated through External Commercial Borrowings (ECBs) and Overseas Foreign Currency Borrowings (OFCBs) were comparatively modest. ECBs brought in $1.74 billion, while OFCBs accounted for $2.80 billion.

FCNR(B) Surpasses 2013 Levels​

The current inflow through the FCNR(B) scheme is highly significant, surpassing the amount mobilized under a similar initiative back in 2013. At less than two months into its operation, the RBI has seen inflows that exceed $26 billion, demonstrating rapid and strong investor confidence in the Indian economy.

This early conclusion of the deposit mobilization window comes amid a backdrop of strengthening financial indicators for India. The nation's foreign exchange reserves rose by $14.1 billion to reach $707 billion in the week ending August 7, representing the highest level seen this fiscal year.

Contrast with Earlier RBI Stance on Swap Window​

The early closure of the FCNR(B) swap window comes into sharp contrast with earlier commentary from RBI Governor Sanjay Malhotra. On April 5, following a monetary policy review, Mr. Malhotra had stated that the central bank did not plan to prematurely close the window due to robust inflows.

Malhotra had also indicated that no proposal for extending the timeline beyond the announced deadline was under consideration at that time. This earlier stance followed concerns regarding the need to continue subsidizing the swap facility, given India's improved financial standing compared to 2013.

Continuation of ECB and OFCB Swap Schemes​

While the FCNR(B) deposit mobilization is closing early, the RBI confirmed that the swap schemes for External Commercial Borrowings (ECBs) and Overseas Foreign Currency Borrowings (OFCBs) will proceed as originally planned. These borrowing facility swaps are set to remain available until December 31, providing continued avenues for banks seeking concessional funding from the central bank.

The mechanism allows banks participating in these facilities to swap their eligible overseas borrowings with the RBI at favorable rates, thereby significantly reducing their cost of funds. This ensures that liquidity management tools remain available across various borrowing types beyond the advanced FCNR(B) deadline.