Reserve Bank of India (RBI) Governor Sanjay Malhotra on Wednesday said there is no proposal at present to prematurely close the concessional foreign exchange swap facility, expressing confidence that the scheme will continue to attract healthy foreign currency inflows.
The FCNR(B) scheme is ending in September, while the OFCB and ECB plans will continue till December. The RBI is bearing the cost of currency hedging under the scheme.
The RBI’s policy steps aimed at attracting foreign capital are expected to result in a balance of payments (BoP) surplus for the current financial year, Malhotra said. “Capital flow measures undertaken in June have supported inflows; as a result, the balance of payments is expected to register a healthy surplus this year.
Indian banks have mopped up $36.73 billion via the special FCNR (B) deposits scheme, as per the RBI data. A total of $40.82 billion in foreign exchange has been received until July 31 through the RBI’s three concessional swap schemes.
The RBI launched the concessional swap facility for fresh FCNR(B) deposits, overseas foreign currency borrowing (OFCB) and external commercial borrowing (ECB) on June 8, as part of broader measures to support the currency and bridge the balance of payment gap.
Malhotra said foreign portfolio investment (FPI) has seen a turnaround during June-July with net inflows of $7.1 billion, primarily driven by the debt segment, after seeing net outflows in April-May.
On the capital account, gross foreign direct investment (FDI) inflows rose to $30.7 billion during April-June, compared to $26.7 billion a year ago. Net FDI inflows also increased, backed by higher gross inflows and a slowdown in the growth of outbound FDI.
He noted that inflows have been strong so far, and expects them to remain healthy going forward. As of now, there is no proposal under consideration to close the scheme prematurely, he added.
When asked about the lack of sufficient appreciation in the rupee because of the schemes, Malhotra said the underlying fundamentals of our economy are very strong. There can be an argument that in terms of the nominal or real effective exchange rate, the rupee may be undervalued.
“There is a lot of uncertainty. It is quite possible that the rupee may further strengthen going forward as tensions and the conflict de-escalate. It has strengthened over the last one month or so from 97 levels now to over 95 levels,” the governor said.
The RBI reiterated that the exchange rate will be determined by market forces, with the regulator intervening only to curb excessive volatility.
“We will continue with our policy of it being determined by market forces, while curbing excessive volatility, checking speculative behaviour and preventing disorderly movements to ensure that it is not out of sync with fundamentals or disruptive of economic activity,” the RBI said in a statement.