RBI's Strategic Swap Bolsters Foreign Reserves
The Reserve Bank of India (RBI) has successfully mobilized more than $50 billion through its special Foreign Currency Non-Resident (Bank) or FCNR(B) swap facility, providing a substantial enhancement to India's external liquidity position. As of August 13, FCNR(B) deposits alone stood at $52.3 billion, with total mobilization, including overseas foreign currency borrowings (OFCBs) and external commercial borrowings (ECBs), reaching $56.8 billion, according to SBI Research.
This initiative allows banks to raise foreign currency deposits from non-resident Indians (NRIs) and then swap these foreign currencies with the RBI for rupees. The mechanism is designed to encourage an inflow of foreign currency into the Indian banking system, thereby strengthening the country's foreign exchange reserves.
Rapid Mobilization Exceeds Expectations
The growth in these deposits has been remarkably swift. FCNR(B) deposits surged from $17.4 billion on July 17 to $36.7 billion by July 31, before climbing further to $52.3 billion by August 13. When factoring in OFCBs and ECBs, the total mobilization escalated from $20.7 billion on July 17 to $56.8 billion by the same August date.
Due to this significant inflow, the RBI announced on August 14 that the window for fresh FCNR(B) deposits under the special swap facility would close on August 31, a month ahead of its original September 30 deadline. SBI Research anticipates that total FCNR(B) mobilization could eventually reach $60-65 billion, with the combined inflow from FCNR(B), OFCBs, and ECBs potentially hitting $80-85 billion.
Understanding the Hedging Cost and Its Impact
While beneficial, these foreign-currency deposits incur a hedging cost for the RBI. SBI Research estimates an average annual USD/INR hedging cost of approximately 3 percent. On a corpus of $70 billion, this translates to an annual notional hedging cost of about $2.1 billion. Over the five-year maturity period of the deposits, the cumulative cost could reach around $10.5 billion.
However, analysts argue that this cost is relatively modest when compared to India's robust foreign-exchange reserves, which are estimated at approximately $700 billion. The report suggests that the $10.5 billion five-year hedging cost would represent only about 1.45 percent of current reserves and roughly 1.27 percent of projected reserves, which are expected to reach around $800 billion over five years.
Positive Outlook for the Rupee
The substantial foreign-currency mobilization is also expected to provide significant support to the Indian rupee by enhancing the nation's external liquidity position. SBI Research predicts the rupee will stabilize around ₹95–₹95.50 per US dollar until the FCNR(B) window closes on August 31, with potential for further appreciation thereafter.
This scenario draws parallels to the 2013 FCNR(B) swap program, where the rupee appreciated by 4.9 percent from its August level by November and gained 8.8 percent by March 2014. The current inflows are crucial for strengthening India's foreign exchange liquidity, offering additional support to the rupee, and building resilience amidst ongoing global bond yield fluctuations, crude price volatility, and geopolitical uncertainties.