Banks raise $27.99 billion via FCNR deposits since RBI swap facility

Banks have pulled in a hefty $27.99 billion through Foreign Currency Non-Resident (FCNR) deposits since the Reserve Bank of India (RBI) opened its dollar-rupee forex swap window. The facility, introduced earlier this year, lets banks swap their dollar-denominated FCNR deposits for rupee liquidity, effectively giving them a cheap source of domestic funds while boosting the country's foreign exchange kitty.

The numbers, reported by economictimes.com, underline a sharp pick-up in overseas Indian deposits. Between the launch of the swap window and late July, banks mobilised the equivalent of nearly Rs 2.3 lakh crore in FCNR (B) deposits. The rush reflects attractive swap rates offered by the central bank, which made it lucrative for banks to bring dollars home.

How the swap window works

Under the scheme, a bank that receives a fresh FCNR deposit can enter into a swap with the RBI. It hands over the dollars to the central bank and receives rupees at a pre-agreed exchange rate, with a commitment to reverse the swap at maturity. This effectively hedges the bank's currency risk and frees up rupee funds for lending.

The RBI designed the facility to encourage banks to attract foreign currency deposits from non-resident Indians (NRIs) and others. For every dollar that comes in, the central bank supplies rupees, easing domestic liquidity without printing fresh money. The swap tenor typically matches the deposit maturity, which ranges from one to five years.

Why the rush now

The timing is no accident. Global interest rates have been elevated, and the rupee has faced intermittent pressure from oil imports and portfolio outflows. By offering a swap window, the RBI effectively subsidised the cost of foreign currency borrowing for banks. That made FCNR deposits more attractive than traditional dollar deposits, which carry higher interest rates and unhedged currency risk.

Bankers say the response has been broad-based, with both public and private sector lenders participating. The deposits have come in across maturities, though the bulk is in the one-to-three year bucket. Some banks have even run special campaigns targeting NRIs in the Gulf and North America, offering preferential swap-linked rates.

Impact on liquidity and the rupee

The inflows have provided a cushion to the country's foreign exchange reserves, which had dipped earlier in the year. They have also helped keep the rupee relatively stable despite volatile global cues. The RBI's swap book, however, now carries a forward dollar liability, which will need to be managed as these swaps mature.

For banks, the facility has been a double-edged sword. On one hand, it brings low-cost funds; on the other, it creates a future dollar outflow when swaps unwind. Still, most lenders view the current window as a net positive, especially given the subdued credit demand in some segments.

What next

The RBI has not indicated whether the swap window will be extended beyond its stated period. With $27.99 billion already mobilised, the central bank may choose to let the facility lapse or reopen it if conditions warrant. Market participants will watch the next monetary policy statement for clues.

For now, the FCNR route has proven its worth as a stabilisation tool. The challenge will be managing the exit when these deposits and swaps mature, particularly if global liquidity tightens further.