RBI’s forex swap draws $136.37 billion, FCNR(B) deposits drive surge

Far exceeding the expectations of bankers and policymakers, the Reserve Bank of India’s special US dollar-rupee forex swap facility has drawn provisional foreign exchange inflows of $136.377 billion through August 31.

The surge in inflows have come through Foreign Currency Non-Resident (Bank), or FCNR(B), deposits, Overseas Foreign Currency Borrowings (OFCBs) and External Commercial Borrowings (ECBs), according to data reported by authorised dealer banks.

FCNR(B) deposits accounted for the overwhelming share of the mobilisation at $127.226 billion. OFCBs contributed $5.260 billion, while ECBs brought in $3.891 billion, the RBI said.

The figures are provisional and subject to final reporting, accounting and reconciliation. Analysts and bankers had expected inflows of $70-$80 billion when the scheme was introduced, and the large scale of the inflows marks a substantial response to the concessional swap facility introduced by the RBI on June 8.

The facility was designed to encourage fresh foreign-currency inflows and support domestic liquidity at a time when the rupee and India’s foreign-exchange reserves were under pressure amid global uncertainties, trade tensions and Middle East conflict.

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.

The latest numbers indicate how sharply mobilisation accelerated during August. 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.

The move made 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%. The rates provided an incentive for overseas investors to bring funds into the banking system.

The country’s foreign exchange reserves rose to a record $729.33 billion as on 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’s intervention revived a tool used during the 2013 period of pressure on the rupee, when a similar scheme helped mobilise about $ 34 billion.