The Reserve Bank of India (RBI) has decided to close its special FCNR(B) deposit swap facility earlier than originally planned, following a sharp increase in foreign-currency inflows through the scheme.
The facility, which was initially scheduled to remain open until September 30, will now accept FCNR(B) deposits mobilised by banks only until August 31, 2026. Banks will be able to complete swaps with the RBI under the facility until September 11.
The early closure comes after banks mobilised $52.3 billion through FCNR(B) deposits by August 13, suggesting that the central bank has attracted foreign currency much faster than anticipated.
RBI Receives More Than $56 Billion Through the Facility
According to RBI data cited in the report, total foreign-currency inflows under the facility had reached $56.85 billion as of August 13.
The inflows consisted of:
FCNR(B) deposits: $52.3 billion
OFCBs: $2.81 billion
ECBs: $1.74 billion
The scale of the inflows appears to have given the RBI sufficient foreign currency to meet its requirements, reducing the need to continue accepting additional funds under the swap arrangement.
Foreign Exchange Reserves Rise Sharply
The decision comes against the backdrop of a significant improvement in India's foreign-exchange reserves.
Foreign-exchange reserves increased by more than $40 billion from the week ended July 3.
In the week ended August 7, India's reserves rose by $14.14 billion to approximately $707 billion. The increase was largely driven by a $9.9 billion rise in foreign-currency assets.
The latest reserve level was described as the highest since the week ended March 13.
India's forex reserves had previously reached a record $728.49 billion in the week ended February 27 before declining as the RBI intervened in the currency market to manage excessive volatility in the rupee.
Why Did the RBI Close the Facility Early?
The early closure indicates that the RBI may have achieved its objective sooner than expected.
Economists quoted in the report suggested that the central bank had attracted foreign-currency deposits faster than anticipated. Continuing to raise additional funds could have resulted in the RBI taking on more liabilities than necessary.
Madhavi Arora, chief economist at Emkay Global Financial Services, said the RBI's assessment of its dollar requirements may have changed as inflows accelerated.
The central bank therefore appears to have decided that there was limited benefit in continuing to raise additional foreign currency once its requirements had been comfortably met.
How the FCNR(B) Swap Facility Worked
The special facility was announced on June 5 and operationalised on June 8.
Under the arrangement, banks could mobilise fresh FCNR(B) deposits with maturities of three to five years and swap the foreign-currency inflows with the RBI at the prevailing spot rate.
The RBI also absorbed the hedging cost under the scheme.
This allowed banks to offer more attractive interest rates to non-resident depositors while encouraging foreign-currency inflows into the Indian banking system.
The facility was introduced partly to strengthen India's foreign-exchange position and support the financial system through additional foreign-currency resources.
Strong Inflows Surprised the Market
When the scheme was announced, some market participants expected foreign-currency inflows to accelerate mainly during August and September.
The response, however, appears to have been much stronger and faster.
The RBI also clarified certain leverage-related issues toward the end of June. According to the report, this clarification helped encourage stronger deposit mobilisation from July onwards.
The result was a rapid accumulation of foreign currency through the scheme.
What About ECBs and OFCBs?
While the FCNR(B) swap window is being closed earlier than planned, the RBI's other related facilities will continue.
The scheme covering external commercial borrowings (ECBs) and overseas foreign-currency borrowings (OFCBs) will remain available until December 31, 2026, as previously announced.
This means the RBI's decision is specifically focused on the FCNR(B) component rather than ending all of the foreign-currency financing measures introduced during this period.
Surplus Liquidity Could Become the Next Issue
The large inflow of foreign currency is positive for India's external position, but it can also create another challenge for the banking system.
Economists have pointed out that large foreign-currency inflows can contribute to additional liquidity in the domestic financial system.
Madan Sabnavis, chief economist at Bank of Baroda, noted that the RBI appears to have received more dollars than it initially required and that the inflows could add to surplus liquidity.
The RBI will therefore need to balance its foreign-exchange reserves with domestic liquidity conditions.
RBI Continues to Rebuild Forex Reserves
The latest development also highlights the RBI's recent efforts to rebuild India's foreign-exchange reserves.
The central bank had previously sold dollars intermittently to reduce excessive volatility in the rupee. More recently, it has resumed dollar purchases amid sustained foreign-exchange inflows.
The result has been a significant recovery in India's reserve position.
What This Means for India
The early closure of the FCNR(B) swap facility sends a relatively clear signal: the RBI believes it has raised sufficient foreign currency through the programme and does not currently need to continue accepting deposits at the originally planned pace.
For the Indian banking system, the strong response demonstrates that non-resident investors and depositors were willing to bring significant foreign-currency funds into the country when the incentives were attractive.
For the RBI, the challenge now shifts toward managing the consequences of these large inflows, including their impact on reserves, liquidity and the rupee.
Key Takeaways
RBI will close the FCNR(B) deposit mobilisation window on August 31, one month earlier than planned.
Banks have already mobilised $52.3 billion through FCNR(B) deposits.
Total inflows under the broader facility reached $56.85 billion by August 13.
India's forex reserves rose to around $707 billion in the week ended August 7.
ECB and OFCB facilities will continue until December 31, 2026.
The strong inflows could increase surplus liquidity in India's banking system.
The early closure suggests the RBI believes its foreign-currency requirements have been substantially met.
Disclaimer
This article is for informational and educational purposes only and should not be considered investment advice or a recommendation to buy or sell any security. Financial markets involve significant risks. Investors should conduct independent research and consider their financial objectives, risk tolerance and circumstances before making investment decisions..
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