The Reserve Bank of India has abruptly closed its FCNR-B swap scheme ahead of schedule, citing robust foreign deposits and rising costs as the rupee faces sustained depreciation pressures, marking a shift in monetary policy response.
The Reserve Bank of India has pulled the plug on its FCNR-B swap window earlier than planned, a move that market participants say reflects stronger-than-expected foreign inflows and the growing cost of maintaining the facility as pressure on the rupee persists. The central bank said on August 14 that India had drawn in $56.8 billion under the broader inflow push, with FCNR deposits contributing $52.3 billion, and moved the deadline for the swap facility forward to August 31 from September 30.
The decision marked a sharp change of tone from just a week earlier, when Governor Sanjay Malhotra had said there was no plan to end the facility ahead of schedule. According to Moneycontrol, treasury officials at private banks believe the economics of the swap arrangement became increasingly difficult for the RBI as deposits surged. The central bank had tried to stimulate inflows in its June policy review by backing hedging costs on three- and five-year FCNR-B deposits and removing the interest-rate ceiling, a step that helped some banks lift rates as high as 7.8%.
The swap scheme was launched on June 5 and opened on June 8 as part of a wider effort to attract foreign currency and relieve strain on the rupee. Business Standard reported that the facility was meant to stay open to fresh FCNR(B) deposits raised through September 30, while the swap window itself was due to run until October 16. Indian Express later reported that banks had already mobilised $17.4 billion from overseas by mid-July, showing how quickly the programme gathered pace. SBI Research had estimated inflows could reach $70 billion if the window remained open until the original deadline.
Rupee weakness also appears to have shaped the RBI’s thinking. A former central banker told the report that the currency has stayed under depreciation pressure even after a brief mid-July recovery, while higher Brent crude prices and geopolitical uncertainty have added to the strain. The same source argued that conditions in the forward market were not favourable enough to justify keeping the facility open longer, suggesting the RBI judged that the risk of rising costs outweighed the benefit of extending the programme further.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
