FCNR (B) deposits surge $28 bn after RBI swap window: MoS Finance

Foreign Currency Non-Resident (Bank) deposits, or FCNR (B), have swelled by $28 billion since the Reserve Bank of India opened a special swap window, according to the Minister of State for Finance. The announcement came during a parliamentary response on Monday, underscoring the central bank's success in attracting dollar inflows during a period of currency volatility.

The swap facility, introduced by the RBI, allowed banks to swap dollar deposits into rupees at a fixed rate, effectively hedging their currency risk. This incentive appears to have worked, with a significant chunk of overseas Indian funds flowing into the banking system over the past year.

What the minister said

The minister, without naming a specific timeline, attributed the rise directly to the RBI's window. "The FCNR (B) deposits have risen by $28 billion following the swap window," he stated in the Lower House, adding that the measure was part of broader efforts to shore up external finances.

Officials have not yet confirmed the exact period over which this growth occurred, but the figure aligns with the central bank's earlier data on non-resident deposits. The surge reflects renewed confidence among NRIs in Indian bank deposits, which offer higher interest rates compared to many global benchmarks.

Why the swap window mattered

The RBI's swap window was a tactical move to encourage banks to raise FCNR (B) deposits without bearing the exchange rate risk. Typically, banks shy away from such deposits when the rupee is depreciating, as the cost of hedging can erode margins. By offering a swap at a predetermined rate, the central bank removed that hurdle.

This is not the first time the RBI has used such a tool; a similar window in 2013 helped stabilise the rupee during the taper tantrum. However, the current context is different, with global interest rates hovering at multi-year highs and capital flows remaining fickle.

Impact on forex reserves and rupee

The influx of $28 billion has provided a cushion to India's foreign exchange reserves, which have been under pressure from trade deficits and portfolio outflows. A stronger reserve position gives the RBI more room to intervene in the currency market, should the rupee face sudden depreciation pressure.

Market analysts note that the FCNR (B) surge also reflects broader confidence in India's macroeconomic stability, even as the global environment remains uncertain. However, these deposits are typically short-to-medium term, and their rollover will be key to sustaining the benefit.

What lies ahead

The minister's statement is likely to be scrutinised by economists tracking capital flows, especially as the swap window's window period may have closed. Whether the RBI extends or recalibrates the facility will depend on evolving external conditions, including US Federal Reserve policy and oil prices.

For now, the banking sector is expected to continue leveraging FCNR (B) inflows to meet credit demand, though the pace may moderate. All eyes will be on the next set of RBI data to see if this trend holds or fades.