Bankers have lauded the Reserve Bank of India's (RBI) surprise move to terminate the FCNR(B) swap facility on August 31, ahead of the original September deadline. The decision is seen as a strategic move to manage future liabilities and hedging costs.

  • The RBI will close the FCNR(B) swap facility on August 31 instead of September 30.
  • Bankers view the move as 'prudent' to manage long-term liabilities.
  • Over $52.3 billion has been raised via this facility as of mid-August.
  • Hedging costs for the RBI are estimated to be around 15% of the total funds raised.

The Reserve Bank of India (RBI) has taken a decisive step by announcing the early closure of the concessional swap facility for Foreign Currency Non-Resident (Bank) deposits. Originally slated to end on September 30, the window will now close on August 31. While the move caught markets by surprise, banking executives have expressed support, labeling the decision as highly 'prudent.'

According to industry insiders, the primary motivation behind this early exit is the management of liabilities. One public sector bank executive confirmed that their internal target of $2 billion has already been met, while others expect to reach their goals comfortably by the month-end deadline. The consensus among bankers is that since these deposits represent a long-term liability, capping the inflow early mitigates future risks.

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Why This Matters

BozokMedia analysis shows that the FCNR(B) scheme has been immensely successful in mobilizing foreign capital. As of August 13, banks had successfully raised $52.3 billion, with an additional $20 billion expected to flow in before the new August 31 deadline. This massive influx significantly bolsters India's foreign exchange reserves.

The potential cost to the RBI for hedging these deposits could reach approximately $10.5 billion, or 15% of the total amount raised.

Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India (SBI), noted that while the hedging costs are substantial, they remain minimal relative to India's current foreign exchange reserves, which stand at approximately $700 billion. However, Ghosh highlighted a discrepancy in market impact; unlike the 2013 scheme which saw a 10% rupee appreciation, the current environment has seen much more muted movement in the exchange rate.

Historical Background

The current mechanism draws parallels to the September 2013 crisis, often referred to as the 'Taper Tantrums,' when the US Federal Reserve signaled a tightening of monetary policy. During that period, a similar RBI scheme helped banks raise roughly $26 billion to stabilize the economy. The current package, which includes concessions for External Commercial Borrowings (ECBs), aims to provide similar stability in a modern macroeconomic context.

Did You Know?: Some NRIs are earning returns as high as 15% on these deposits due to the leverage provided by the swap facility.

Frequently Asked Questions

1. Why did the RBI change the deadline for the FCNR(B) swap?
The RBI cited an 'encouraging response' and likely aimed to manage the high cost of currency hedging and future liabilities.

2. How much money has been raised under this scheme so far?
As of August 13, approximately $52.3 billion has been raised through the FCNR(B) swap facility.