The Reserve Bank of India’s newly introduced dollar-rupee swap facility for banks is boosting foreign currency inflows but creates a lag in reserve accumulation, coinciding with a liquidity oversupply in the banking system.
The Reserve Bank of India’s special swap window for foreign currency deposits is helping banks raise hard currency, but the way the facility is scheduled means the impact on the central bank’s reserves can arrive with a delay.
According to Business Standard, each bank has been given a single day a week to tap the concessional dollar-rupee swap window for fresh Foreign Currency Non-Resident (Bank) deposits, or FCNR(B) deposits. That means dollars mobilised late in one week may stay on a bank’s balance sheet for several days before being swapped with the RBI, creating a temporary gap between deposit mobilisation and the build-up of foreign currency assets at the central bank. A banker quoted by the paper said the timing depends on when deposits are raised relative to the bank’s allotted day, with the previous week’s inflows typically swapped only when that day comes round again.
The RBI introduced the facility on June 5 and operationalised it on June 8, with the window open until September 30 for fresh FCNR(B) deposits with original maturities of three to five years. Under the scheme, banks can swap the foreign currency raised from non-resident Indians with the RBI at the prevailing spot rate, while the central bank returns the currency at maturity at a concessional cost. The measure is designed to encourage banks to attract more foreign currency deposits and ease pressure on forex liquidity. Business Standard also reported that similar deposits mobilised until September 30 are exempt from cash reserve ratio and statutory liquidity ratio requirements.
Market participants said the inflows have contributed to a sharp rise in banking system liquidity, alongside roughly ₹1 trillion in government spending. RBI data showed net liquidity in surplus by ₹3.48 trillion on Sunday, prompting the central bank to conduct two variable rate reverse repo auctions on Monday. Banks bid a combined ₹1.54 trillion against a notified ₹2 trillion, while the weighted average call rate, the central bank’s operating target for monetary policy, held at 5.09 per cent.
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