More Than Expected Foreign Inflows Behind RBI's Early Closure Of FCNR-B Swap Window
The Reserve Bank of India’s decision to close its FCNR-B swap window nearly a month ahead of schedule may have been driven by stronger-than-expected inflows and rising costs associated with supporting the facility, particularly as the rupee remains under pressure. The central bank announced on August 14 that India had attracted $56.8 billion in inflows, with FCNR deposits accounting for $52.3…
The Reserve Bank of India (RBI) concluded its FCNR-B swap window over a month earlier than planned, a move potentially influenced by stronger-than-anticipated inflows and mounting support costs, especially given the weakened position of the rupee. On August 14, the central bank disclosed that India had received $56.8 billion in inflows, with FCNR deposits contributing $52.3 billion.
In response to this robust demand, the RBI extended the swap facility's deadline from September 30 to August 31. This decision followed RBI Governor Sanjay Malhotra's earlier assurance that there were no plans to prematurely terminate the facility. Market participants speculate that the increasing costs of maintaining the facility may have played a crucial role in the early closure.
A treasury head at a leading private bank highlighted that cost implications were a significant factor behind the decision. The RBI had implemented several measures in its June policy review to attract capital inflows, such as easing support for hedging costs on three- and five-year FCNR-B deposits and removing the interest-rate ceiling on these deposits, leading some banks to raise FCNR-B rates to 7.8%.
Estimates suggest that FCNR-B inflows could have reached $70 billion if the window remained open until September. The decision to close the facility early might also be linked to the ongoing pressure on the rupee. Despite the USD/INR exchange rate remaining relatively stable and showing a depreciation bias, the rupee's value has fluctuated.
It closed at Rs 95.39 per dollar on June 5 and decreased to around Rs 95.45 on August 14. Although it briefly strengthened to Rs 94.30 in mid-July following the introduction of inflow measures, this recovery did not last long. Recent strengths in Brent crude prices and geopolitical uncertainties have added additional pressure on the domestic currency.
Furthermore, supportive conditions in the forward market have not been sufficiently robust to encourage economic hedging by the RBI. Consequently, the central bank may have favored ending the facility earlier rather than allowing inflows and associated costs to persist.
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