The Reserve Bank of India (RBI) has permitted banks to access the foreign exchange swap window for overseas deposits more than once a week, according to currency traders. This change comes as the window nears its closing date, prompting a rush to attract dollar inflows.
According to earlier guidelines, a bank can avail the swap facility only once in a week.
“Since this is the final week before the August 31 deadline, only a few days remain. The RBI said that banks can now access the swap window every day, and it applies to overseas deposits above $100 million,” said a senior dealer at a private sector bank.
He added that banks are facing maturity mismatches. “Banks cannot hold onto those dollars for long; they typically need to sell them. This additional burden is precisely why the RBI has allowed more frequent access to the swap window.”
The RBI has preponed the closure of its special swap window for Foreign Currency Non-Resident (Bank) deposits to August 31, a month earlier than originally planned. As a result, banks have accelerated their efforts to gather dollar deposits before the swap window closes and created a surge in dollar liquidity.
Banks have mopped up $65.4 billion via FCNR(B) deposits till August 21, according to the latest central bank data. Total inflows, including external commercial borrowing and overseas foreign currency borrowing, stood at $72.8 billion.
With the excess dollar liquidity, the one-day dollar/rupee premium climbed to a high of 3.9% on Thursday compared to an average of 0.93% over the past week, as per Bloomberg data.
“Many foreign banks must hold only a portion of their exposures in dollars and the rest maintained in rupee. To comply, they conducted sell-buy swaps: selling dollars immediately and buying rupees with an agreement to reverse the exchange later. This rush to convert dollars into rupees has led to market panic,” said another dealer at a state-owned bank.