More Than Expected Foreign Inflows Behind RBI's Early Closure Of FCNR-B Swap Window
· Free Press Journal
The Reserve Bank of India’s decision to close its FCNR-B swap window nearly a month ahead of schedule may have been driven by stronger-than-expected inflows and rising costs associated with supporting the facility, particularly as the rupee remains under pressure.
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The central bank announced on August 14 that India had attracted $56.8 billion in inflows, with FCNR deposits accounting for $52.3 billion. Following the strong response, the RBI advanced the deadline for the swap facility to August 31, from September 30.
Strong inflows raise carrying-cost concerns
The decision came just a week after RBI Governor Sanjay Malhotra had indicated that there were no plans to shut the facility prematurely.
According to a report by Moneycontrol, money market participants believe the growing cost of maintaining the facility could have influenced the change.
RBI Ends FCNR(B) Swap Facility Early After $40.8 Billion Forex InflowsA treasury head at a leading private bank was cited as saying that the cost implications appeared to be the most significant factor behind the earlier-than-expected closure.
The RBI had introduced several measures in its June policy review to encourage capital inflows, including support for hedging costs on three- and five-year FCNR-B deposits. It also removed the interest-rate ceiling on such deposits, prompting several banks to raise FCNR-B rates to as high as 7.8%.
SBI Research had earlier estimated that FCNR-B inflows could reach $70 billion if the window remained open until September.
Rupee pressure adds to RBI concerns
According to the report, a former central banker said the decision could also be linked to continued pressure on the rupee. Unlike earlier periods, the USD/INR exchange rate has remained relatively stable while maintaining a depreciation bias.
The rupee closed at Rs 95.39 per dollar on June 5 and stood at around Rs 95.45 on August 14. Although it strengthened to Rs 94.30 in mid-July after the inflow measures were introduced, the recovery subsequently lost momentum.
Recent strength in Brent crude prices and geopolitical uncertainty have added pressure on the domestic currency.
The former central banker also pointed to conditions in the forward market, which have not been sufficiently supportive of economic hedging by the RBI. Against this backdrop, the central bank may have decided that ending the facility earlier was preferable to allowing inflows and associated costs to continue rising.