RBI to fully absorb forex risks, inflows may see $50bn boost

MUMBAI: Reserve Bank of India has opened the dollar tap by taking on the currency risk itself to draw in overseas money, while nudging state-owned borrowers to look abroad for cheaper funds.
RBI will not charge any premium for swapping dollars raised through foreign currency non-resident bank FCNR(B) deposits, effectively absorbing the entire forex risk and allowing banks to offer higher returns to NRIs. In addition, FCNR(B) deposits of three to five years will be exempt from the cash reserve ratio and statutory liquidity ratio, lowering the cost of mobilising such funds for banks.

A higher return on foreign currency non-resident (FCNR-B) deposits provides an arbitrage opportunity to NRIs – borrow money from banks abroad and park it in India and pocket the difference in rates.

For external commercial borrowings, the central bank has set a swap cost of 1.5% a year, making overseas loans attractive for top-rated PSUs compared with domestic funding. Bankers are pencilling in inflows of around $50 billion across the two schemes.

The latest window also sidesteps a regulatory constraint that had tightened earlier this year. Dollar swap deals with RBI will be kept outside the limits on net open position, a move aimed at encouraging participation without running into balance sheet caps that were introduced to curb speculation in the forex market.

The FCNR(B) swap window will remain open until Oct 16, 2026, for deposits mobilised up to Sept 30, while the ECB and OFCB swap facility will run until Jan 15, 2027, for drawdowns up to Dec 31, 2026.

RBI governor Sanjay Malhotra on Friday said there is no target or cap for mobilisation under the schemes, while making it clear that the concessional swap window for ECBs is limited to public sector undertakings. “Benefits to PSUs are passed on to the general public because they are catering more to utilities and infrastructure. If we extend to the private sector, the benefits are not as widely dispersed,” he said. The pricing mechanics underline the policy intent. RBI will charge a fixed premium of 1.5% a year, compounded semi-annually, on swaps linked to ECBs and OFCBs. Authorised dealer category-I banks will sell dollars to RBI at the prevailing FBIL reference rate on a spot basis and, at maturity, return rupee funds along with the accumulated premium to buy back the dollars.

RBI has also given banks balance sheet comfort by allowing them to exclude swap positions arising from these transactions while computing net open position. According to the circular, this ensures that the forex exposures created by these multi-year swaps do not eat into regulatory limits under FEMA guidelines. The swaps will be non-cancellable, and FCNR(B) deposits will carry a 1-year lock-in on premature withdrawal.
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