RBI Ends FCNR(B) Swap Scheme, Reshaping Rupee Liquidity

Key Moments

FCNR(B) Swap Facility Closure and Policy Context

Commerzbank analysts note that the Reserve Bank of India’s decision to shut the FCNR(B) concessional FX swap window ahead of schedule comes after strong foreign exchange inflows and mounting liquidity costs. The facility, which targeted FCNR(B) deposits, is described as having provided a meaningful source of rupee liquidity and demand for government securities.

According to the analysts, the closure removes one important avenue for adding rupee liquidity, at a time when the RBI already holds larger foreign exchange reserves and a sizable forward book, reducing the central bank’s need to take on additional liabilities.

Details of the Early Termination

“The Reserve Bank of India (RBI) announced that it will close its concessional FX swap facility for FCNR(B) deposits on 31 August, a month ahead of the original 30 September deadline. RBI attributed the early closure to the “encouraging response to the swap facility for FCNR(B) deposits and the resulting FX inflows”. As of 13 August, the facility had attracted USD52.3bn.”

“The decision was unexpected and surprised markets as RBI Governor Sanjay Malhotra had said just over a week earlier that there was no proposal to close the scheme prematurely. Measures to support inflows via overseas foreign currency borrowing (OFCB) and external commercial borrowing (ECB) remain in place until 31 December.”

The analysts interpret the move as reflecting a reduced marginal benefit from continuing the scheme, alongside escalating liquidity and balance-sheet costs.

Liquidity, Bonds, and Cost-Benefit Reassessment

“The early termination likely reflects a combination of diminishing benefits and rising liquidity and balance-sheet costs. The FCNR(B) inflows generated substantial rupee liquidity, part of which flowed into government bonds and helped compress yields, particularly at the shorter end and belly of the curve. The early closure therefore removes a source of incremental liquidity and bond demand.”

“The decision therefore looks more like a cost-benefit recalibration than a signal that the RBI has become outright bullish on INR.”

In line with this view, Commerzbank emphasizes that the change in stance on the FCNR(B) facility is driven more by operational and cost considerations than by a major shift in the central bank’s currency outlook.

FX Market Reaction and INR Trading Range

“In FX, USD/INR rose 0.2% to 95.61 yesterday following RBI’s surprise decision to end the FCNR(B) facility early. The pair has remained broadly range-bound between 94.70-96.70 since early July, with RBI intervention helping suppress volatility.”

Despite the immediate uptick in USD/INR, Commerzbank points out that the currency pair continues to trade within a relatively tight corridor, with central bank operations limiting both volatility and depreciation pressures.

Potential Near-Term Headwinds for INR

“Near-term INR headwinds could come from higher precious metal imports, with gold prices rising and reports suggesting that 400 tonnes of silver import licenses have been approved.”

The analysts highlight that increased demand for imported precious metals could weigh on the currency in the near term, adding an external sector consideration to the evolving liquidity and policy backdrop.

Key Data Points at a Glance