A last-minute rush for the Reserve Bank of India’s special forex swap window has pushed mobilisation through foreign currency non-resident, or FCNR(B) deposits, at $127.22 billion by August 31 – well above the earlier estimates. Overall, the total foreign currency mobilisation was a staggering $136.4 billion, according to provisional data by the RBI.
FE was the first paper to report that collections through FCNR (B) has crossed $100 billion on Wednesday.
FCNR(B) deposits did most of the heavy lifting in the last 10 days as well. They jumped by $61.8 billion in the final 10 days, from $65.4 billion on August 21 to $127.2 billion on August 31. In comparison, OFCB inflows increased from $4.9 billion to $5.3 billion, while ECB-related inflows rose from $2.6 billion to $3.9 billion.
Total inflows, which stood at $72.8 billion on August 21, nearly doubled to $136.4 billion by August 31. The surge came as India’s foreign exchange reserves touched an all-time high of $729.33 billion on August 21.
The RBI had introduced the special USD-INR forex swap facility in June to draw foreign currency into the banking system and ease liquidity conditions. The facility covers three channels — FCNR(B) deposits, ECBs and OFCBs — through which banks and borrowers can raise foreign currency.
The response was so strong that the RBI shut the FCNR(B) window a month ahead of schedule, amid concerns over the eventual reversal of such large inflows. The facility was originally scheduled to remain open until September 30 but closed on August 31. Banks can, however, avail of the swap facility for deposits already contracted until September 11.
In an interview with FE, RBI Governor Sanjay Malhotra said the response had exceeded the expectations of both the central bank and market participants. “There is a diminishing marginal utility of every dollar that is swapped. At the same time, there is an increasing marginal cost because you need to sterilise it for a longer period,” Malhotra said.
The scale of mobilisation has also been much higher than the banking sector’s initial estimates. When the scheme was announced in June, bankers had expected FCNR(B) deposits to attract around $40-50 billion.
An SBI Research Ecowrap report had estimated fresh FCNR(B) inflows of $40-45 billion, drawing on the experience of a similar RBI facility in 2013, which mobilised $24.5 billion in three months. At $127.2 billion, the eventual FCNR(B) mobilisation is nearly three times the upper end of those estimates.
Madhavi Arora, chief economist at Emkay Global Financial Services, expects core banking system liquidity to peak above Rs 10 lakh crore in September, potentially forcing the RBI to deploy durable liquidity-absorption measures.
“With the liquidity impact now larger than anticipated, some durable liquidity-absorption tools are likely to be deployed, including FX shorter tenor sell-buy swaps and MSS, or even ICRR (less likely),” Arora said.
The RBI could also take delivery of around $32 billion from its forward book due to mature over the next year, helping ease the liquidity pressure.
The massive mobilisation, however, comes with a longer-term price tag. The swaps create future dollar-denominated liabilities for the RBI and could entail an indirect fiscal cost through lower central bank dividends, potentially exceeding Rs 1 lakh crore cumulatively, according to Arora.