RBI's forex swap facility draws $136 billion, FCNR(B) deposits lead inflows

Record inflows under RBI's forex swap facility

The Reserve Bank of India (RBI) has mobilised $136.38 billion in foreign exchange inflows through its special USD-INR swap facility, with Foreign Currency Non-Resident (Bank) deposits, or FCNR(B), accounting for the bulk of the inflows, according to data released by the central bank on Wednesday.

Banks mobilised $127.23 billion through FCNR(B) deposits under the facility, while inflows through Overseas Foreign Currency Borrowings (OFCBs) stood at $5.26 billion and External Commercial Borrowings (ECBs) accounted for $3.89 billion, the RBI said.

The facility, introduced on June 8, was aimed at boosting foreign exchange inflows into the country. It covers FCNR(B) deposits, ECBs, and OFCBs. FCNR(B) deposits are foreign-currency deposits maintained by non-resident Indians (NRIs) with Indian banks, while ECBs are loans raised by Indian companies and other eligible entities from overseas lenders. OFCBs are bonds issued by Indian entities in foreign currency to raise funds from international investors.

The latest figures are provisional and subject to final reporting, accounting, and reconciliation, the RBI said.

Early closure of FCNR(B) window

The strong response prompted the RBI to close the FCNR(B) window a month ahead of schedule. The facility, originally scheduled to remain open until September 30, was closed on August 31 after the central bank said its objective had been achieved ahead of schedule.

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.

Why FCNR(B) deposits surged

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, making it more attractive for banks to mobilise foreign currency deposits from non-resident Indians and other eligible depositors. 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%.

Impact on reserves and rupee

The inflows are expected to provide major relief to the Indian rupee by swelling India's foreign exchange reserves. The country's foreign exchange reserves rose to a record $729.33 billion as of 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 had introduced the facility to deal with forex outflows due to high oil prices and flight of capital owing to the exit of Foreign Portfolio Investors from the stock market. The rupee had come under pressure when these measures were announced. With these inflows, the rupee has recovered partially.

Bank-wise mobilisation

The RBI did not provide bank-wise mobilisation figures. However, private-sector lender ICICI Bank said separately that it had mobilised $17.88 billion through FCNR(B) deposits up to August 31. Loans provided by the bank's international branches and subsidiaries against such deposits stood at $9 billion, while standby letters of credit issued to other banks against loans backed by the deposits amounted to $3.63 billion.

Historical context and outlook

The RBI revived a tool used in 2013, when a similar scheme mobilised about $34 billion, according to The Indian Express. The Times of India reported that the 2013 scheme mobilised around $26 billion in nearly three months. The current initiative comes from a position of stronger macroeconomic fundamentals and higher forex reserves compared to 2013.

The finance ministry said last week that the large-scale mobilisation of long-term non-resident deposits and institutional funding would strengthen India's external buffers while providing foreign-currency resources to banks and companies, as reported by The Times of India, citing news agency PTI. The ministry also said the FCNR(B) window achieved its objective ahead of schedule.

SBI Research estimated that the potential cost to the RBI of hedging the deposits could be around 15% of the amount raised, according to The Indian Express. CareEdge Ratings said the inflows provide banks with stable medium-term funding but FCNR(B) deposits are expected to remain only around 3% of total deposits.