RBI may not introduce FCNR swap window as forex reserves comfortable, say experts

The Reserve Bank of India (RBI) may not introduce the so-called Foreign Currency Non-resident (FCNR) swap window to protect the rupee’s value against the dollar. The reason, forex experts told Moneycontrol, is that the central bank’s foreign exchange reserves, though off its highs, are quite comfortable and that such measures are expensive.

“Currently we are not seeing the need for a swap-like window as forex reserves have been sufficient and such swaps generally cost more,” said Amit Pabari, managing director at CR Forex. “If the situation worsens and the rupee depreciates beyond 82-83 kind of levels, then possibly the RBI may have to turn to it as one of the last resorts.”

The rupee has lost over 1 percent against the dollar in July, which though less than June’s 1.7 percent decline, has taken the currency’s fall in 2022 to 7.6 percent, as per Bloomberg data. A combination of a record high trade deficit coupled with persistent foreign portfolio investor outflows and bets on an aggressive US Federal Reserve policy had kept the dollar well bid.

The rupee breached the psychologically important level of 80 per dollar for the first time on July 19 and hit a lifetime low of 80.06. Since then, it has appreciated slightly and now stands at 79.90 per dollar.

What’s the FCNR swap window?

In 2013, due to the taper tantrums caused by the unexpected tightening of US monetary policy, there was a precipitous fall in the rupee to a then-record low of 68.80 per dollar. In order to tackle the crisis, Raghuram Rajan, who was the central bank governor at the time, announced several measures including the FCNR swap window in September 2013 to bolster forex reserves and stabilise the rupee. These steps garnered $34 billion from non-resident Indians (NRIs).

Under this window, the RBI bore the risk in a swap scheme for banks. This made mobilisation of leveraged FCNR (bank) or FCNR(B) deposits highly lucrative, said experts.

On July 6 this year, the RBI introduced similar measures to boost foreign inflows, but such a window was not introduced.

At present, the RBI is using its foreign exchange reserves to protect the rupee when volatility is high. India’s foreign exchange reserves fell by $7.5 billion to $572.71 billion in the week ended July 15, the lowest in 20 months. RBI governor Shaktikanta Das has repeatedly said that the central bank will not tolerate wild swings in the rupee’s exchange rate. On July 22, Das said India’s forex reserves were “adequate” and added that “you buy an umbrella to use when it rains”.

Lacklustre response

Despite introducing several measures, the RBI has failed to attract chunky foreign deposits, said bankers. Even after a couple of weeks of such measures being introduced and several banks increasing their FCNR(B) rates, there has not been any significant response from overseas depositors.

“It should be a change for the good but since the time is limited and there is no buy-sell swap offered by the RBI, this time the attractiveness of the deposit is not there,” said Anil Bhansali, head of treasury, Finrex Treasury Advisors. “Further, the circumstances then and now are quite different as the Fed is now on a big hiking spree and rates in the US are skyrocketing.”

According to experts, even if there is a swap window, there is a low probability that it will attract NRI investments in India.

“Usually, there is an increase in the second half of the year. So it is likely that there will be a hike in foreign inflows but that won’t be anything near to what happened in 2013, as in 2013 it was more like a no currency risk of a swap. The entire currency risk was on the RBI in 2013,” said Anindya Banerjee, vice-president, currency derivatives and interest rate derivatives, at Kotak Securities.

Another major factor leading to lower NRI investment in India is the higher dollar rates. Despite several measures by the central bank, India is unable to offer the interest rate that one gets if they invest in US dollars.

“The Indian diaspora in various countries, be it in the European countries or Middle East nations, can put their money in dollars and get the dollar interest rates,” said Banerjee.

While using a swap facility, NRIs can earn extra returns of about 25-30 basis points over the normal interest rates on their deposits in Indian commercial banks between July 7 and October 31, 2022. “The deposits can be made in the permissible foreign currency without converting to the rupee. FCNR deposits can be made in currencies such as the US dollar, British pound, euro, yen, Australian dollar, Singapore dollar and Canadian dollar. Since the principal and the interest are transferred in the same currency, there is no exchange rate risk,” said Sugandha Sachdeva, vice-president, commodity and currency research, Religare Broking.