RBI's forex swap window attracts $72.85 bn till Aug 21, Pg4

Key Highlights:

• The Reserve Bank of India's (RBI) special forex swap facility attracted $72.85 billion in foreign exchange inflows by August 21.
• The facility was prematurely closed on August 31, ahead of its initial September 30 deadline, due to an "encouraging response".
• Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits accounted for the largest share of inflows, totaling $65.397 billion.
• The scheme was introduced to augment forex liquidity and provide support to the Indian rupee.

RBI Forex Swap.jpg

Detailed Insights:

• The RBI launched the special USD-rupee concessional swap facility on June 8.
• It aimed to encourage fresh foreign currency inflows through FCNR(B) deposits, Overseas Foreign Currency Borrowings (OFCB), and External Commercial Borrowings (ECB).
• The facility was crucial during a period when the rupee and India's foreign exchange reserves were under pressure.
• The premature closure was also influenced by the high potential hedging cost for the RBI, estimated at around 1.5% of the amount raised.
• FCNR(B) deposits are fixed-term deposits maintained by non-resident Indians in designated foreign currencies like USD, GBP, and EUR.
• Interest earned on FCNR(B) deposits is exempt from income tax in India for eligible non-resident depositors.

Key Concepts Involved:

• Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits: Fixed-term deposits held by non-resident Indians in foreign currencies with banks in India.
• Overseas Foreign Currency Borrowings (OFCB): Borrowings by Indian entities from overseas markets in foreign currency.
• External Commercial Borrowings (ECB): Commercial loans raised by eligible resident entities from recognized non-resident entities.
• Forex Swap Facility: An arrangement where the central bank exchanges foreign currency for domestic currency with commercial banks, with an agreement to reverse the transaction at a future date.