The Reserve Bank of India’s (RBI’s) decision to prematurely close its concessional swap facility for FCNR(B) deposits, coupled with a rise in crude oil prices to nearly $90 a barrel, sent the rupee lower on Monday, though intervention by the central bank prevented a sharper slide.
Despite a softer dollar, the rupee was the worst-performing currency in Asia, depreciating 0.2% to close at a 17-day low of 95.61 against the dollar as importers rushed to take forward cover.
Currency expert Jamal Mecklai said the market was reacting to mixed signals from the central bank after the RBI decided to advance the closure of the swap scheme, having earlier indicated that it would run its course.
“The market reacted to confused signals as the RBI announced premature closure of the swap scheme after stating that it would run its course. You don’t want a market where everyone is saying the rupee is falling. The regulator’s job is to change that belief. That is the credibility that the market is looking for from the RBI,” Mecklai said.
He believes the RBI decided to close the scheme after receiving the inflows it was seeking, while also being wary of attracting excessive flows. Exporters are holding back dollar sales even as importers are stepping up purchases. And despite the sizeable inflows, the rupee has not strengthened.
Ananth Narayan, former whole-time member of the Securities and Exchange Board of India (Sebi), agreed that the scheme had achieved its objective faster than anticipated. Given the cost of the subsidised swaps, the RBI’s decision to close the facility after securing adequate foreign exchange was prudent, he said. “The substantial accretion to FX reserves expands the RBI’s capacity to manage market volatility,” Narayan said.
Mecklai, however, said the market would now be watching the central bank’s next move. “The REER is supremely undervalued. The RBI is doing its job but there are structural issues that the government needs to sort out,” he added.
The RBI has advanced the deadline for mobilisation under the FCNR(B) facility to August 31 from September 30. The external commercial borrowing (ECB) and overseas foreign currency borrowing (OFCB) windows, however, will remain open until December 31.
Gaura Sengupta, chief economist at IDFC FIRST Bank, said Monday’s depreciation could have been a knee-jerk reaction to the early closure of the special swap window, but the RBI should be able to contain pressure on the currency.
“The rupee had depreciated by 11% in FY26 when we had a balance of payments deficit of $24 billion. This time around, we have a BoP surplus of $40 billion, so we believe that the RBI will be able to contain the pressures on the rupee,” she said.
Heavy intervention by the RBI has kept the rupee largely range-bound in August, even after the currency witnessed sharp depreciation over the past year and touched an all-time low of 96.96 against the dollar on May 20.
“For the near term, we expect $/rupee to hold a 95–96 range. The market will now look beyond the window to the underlying position, which remains supportive — reserves have rebuilt substantially, portfolio flows have improved and crude remains benign. We continue to expect a gradual appreciation towards 94 over the course of the fiscal year,” said Anindya Banerjee, senior vice-president and head of commodity research at Kotak Securities.
An SBI Ecowrap reports expects the the FCNR(B) deposit inflows could settle at around $70 billion by the end of this month.
While the rupee was the worst performer in Asia, the performance of other currencies was mixed. The Malaysian ringgit gained 0.62%, while the Taiwanese dollar appreciated 0.61%. The Philippine peso declined 0.06%, while other regional currencies, including the Chinese renminbi, strengthened.
Meanwhile, yields in the government securities market also rose. The benchmark 10-year government bond yield climbed 5 basis points to close at 6.79%, while the five-year yield rose 8 basis points to 6.41%.