Source Bussiness standard
MUMBAI — In a sudden move aimed at recalibrating its foreign exchange management, the Reserve Bank of India (RBI) has announced the premature termination of its concessional swap facility for Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits. Banks will now only be permitted to route deposits through this special window until August 31.
The swap facility was originally introduced to incentivize domestic banks to aggressively market foreign currency deposits to Non-Resident Indians (NRIs). Under the scheme, banks could swap the US dollars raised through these FCNR(B) deposits with the central bank for Indian Rupees at a fixed, concessional rate. This mechanism effectively shielded the banks from exchange rate volatility and significantly bolstered India’s foreign exchange reserves during periods of currency pressure.
Market analysts view the central bank’s decision to sunset the program ahead of schedule as a signal of macroeconomic confidence. With foreign exchange reserves sitting at comfortable levels and the Rupee demonstrating stability against the greenback in recent trading sessions, the RBI likely determined that the costly concessional window is no longer necessary.
“The premature withdrawal indicates that the central bank is satisfied with the liquidity and the current dollar-inflow trajectory,” said a senior banking economist based in Mumbai. “Continuing the swap facility would mean absorbing unnecessary hedging costs on the RBI’s balance sheet.”
What This Means for Banks and Depositors
For commercial banks, the August 31 cutoff means a frantic final push to mobilize NRI deposits before the concessional hedging benefits disappear. Post-deadline, banks will have to manage their currency risks in the open market, which involves paying standard premium rates.
For Non-Resident Indians, the underlying FCNR(B) accounts will remain available, but the promotional, high-yield interest rates that banks offered to lure these deposits may see a downward revision starting in September, as the banks’ cost of hedging increases.
The central bank clarified that all swaps executed under the facility on or before the August 31 deadline will be honored through their full maturity periods. Market participants will be closely watching the RBI’s upcoming monetary policy communications for further cues on its foreign exchange strategy.
