SBI Research believes RBI’s decision to close the special FCNR(B) swap facility a month early was likely driven by the achievement of targeted foreign currency inflows.
The report estimates a five-year hedging cost of around $10.5 billion, which remains small compared with India’s foreign exchange reserves.
Highlights
- RBI will close the FCNR(B) special swap window on August 31 instead of September 30.
- SBI Research says targeted foreign currency mobilisation may already have been achieved.
- FCNR(B) deposits stood at $52.3 billion as of August 13.
- Total mobilisation under the facility reached $56.8 billion.
- SBI Research estimates the five-year hedging cost at around $10.5 billion.
- India’s foreign exchange reserves currently stand at around $700 billion.
The Reserve Bank of India’s decision to close its special FCNR(B) swap facility a month ahead of schedule may indicate that the central bank has already achieved its targeted foreign currency inflows, according to SBI Research.
The RBI on August 14 announced that the window for fresh Foreign Currency Non-Resident (Bank), or FCNR(B), deposits under the special swap facility would close on August 31, 2026, instead of the earlier scheduled date of September 30.
In its Ecowrap report, SBI Research said the cost associated with the swaps was unlikely to have been a major factor behind the early closure.
How Much Could the Swap Cost?
SBI Research estimates potential FCNR(B) mobilisation at around $65-70 billion. Assuming an average USD/INR hedging cost of around 3% annually, the notional cost on a $70 billion corpus could be approximately $2.1 billion per year.
If the hedging cost remains at 3% throughout the five-year maturity period, the cumulative cost could reach around $10.5 billion, equivalent to 15% of the corpus.
However, the report said this amount remains relatively small when compared with India’s foreign exchange reserve position.
With reserves currently at around $700 billion and incremental reserve accumulation assumed at roughly $20 billion annually, the estimated five-year hedging cost would represent only around 1.45% of the current reserve stock.
Why Did RBI Close the Window Early?
SBI Research said the announcement surprised market participants, particularly because the RBI Governor had earlier indicated that there was no intention to close the scheme ahead of schedule.
The report suggested that the most likely explanation was that the targeted FCNR(B) mobilisation had already been achieved.
FCNR(B) deposits stood at $52.3 billion as of August 13, while total mobilisation under the facility, including overseas foreign currency borrowings (OFCBs) and external commercial borrowings (ECBs), reached $56.8 billion.
SBI Research expects FCNR(B) mobilisation to eventually reach $60-65 billion, while total inflows, including OFCBs and ECBs, could reach $80-85 billion.
Rupee Sees Limited Impact
Despite sizeable foreign currency inflows, the rupee has shown little appreciation so far. SBI Research estimated that the currency has strengthened only around 0.1% from its opening levels when the FCNR(B) scheme began.
This is significantly different from 2013, when the rupee appreciated 4.9% between August 31 and November 30 and strengthened 8.8% by March 2014 following a similar FCNR(B) swap window.
SBI Research said current global and domestic economic conditions are different from 2013, but the inflows are still expected to remain supportive for the rupee.
