FX Swap Schemes Built Buffers With Maximum Cost-Efficiency: Fin Min, Pg11

Key Highlights:

• The Ministry of Finance praised the Reserve Bank of India's (RBI) concessional swap facilities for building external buffers with cost-efficiency.
• These schemes, including Foreign Currency Non-Resident (Bank) deposits (FCNR(B)), attracted $72.85 billion by August 21.
• The FCNR(B) swap window closed early on August 31, a month before its original September 30 deadline.
• The RBI bears the entire hedging cost for the FCNR(B) deposits under this specific scheme.

Detailed Insights:

• The Reserve Bank of India launched these concessional swap facilities on June 8 to attract foreign currency inflows.
• Speculation arose that the FCNR(B) scheme's early closure was due to high costs, estimated at $10 billion over five years.
• Economists, however, largely disagreed that the cost was the primary factor for the early termination.
• Swap facilities for Overseas Foreign Currency Borrowings and External Commercial Borrowings will continue until December 31.
• The schemes aimed to bolster India's foreign exchange reserves, enhancing economic stability.

Key Concepts Involved:

• FX Swap Scheme: An agreement to exchange currencies at a specific rate and reverse the exchange at a future date.
• FCNR(B) Deposits: Foreign currency deposits held by Non-Resident Indians in Indian banks, denominated in foreign currency.
• External Commercial Borrowings (ECBs): Loans raised by Indian entities from recognized non-resident lenders.
• External Buffers: A nation's foreign exchange reserves, crucial for managing balance of payments and currency stability.