RBI’s FCNR(B) Swap Closure: Rupee Weakens, Bond Yields Rise
By ThePip Desk
The Reserve Bank of India unexpectedly closed its FCNR(B) forex swap facility early, impacting the rupee’s value and increasing government bond yields.
The Reserve Bank of India (RBI) unexpectedly closed its concessional FCNR(B) forex swap facility on Friday, a full month ahead of its scheduled end. This swift action immediately triggered a weakening of the rupee and a notable rise in government bond yields.
Immediate Market Movements
Following the RBI’s announcement, the rupee concluded trading at 95.61 per dollar. This movement reflects the direct impact of the facility’s early termination on currency markets.
Concurrently, the benchmark 10-year government bond yield saw an increase, settling at 6.81 per cent. Bond yields typically rise when investors demand higher returns for holding government debt.
Understanding Dealer Concerns
The premature closure has prompted significant concern among currency dealers regarding the trajectory of future dollar inflows into the Indian market. They are also closely monitoring potential implications for overall liquidity within the financial system.
This unexpected decision by the central bank departed from market expectations, as participants had anticipated the facility would run its full course.
Factors Influencing Rupee Pressure
Beyond the swap facility’s closure, the rupee faced additional downward pressure from consistent dollar demand by importers. This continuous need for foreign currency contributes to its depreciation.
Furthermore, the persistently high prices of Brent crude oil played a role in the rupee’s weakening. India, as a major oil importer, sees its currency affected by global energy costs.
RBI’s Mobilisation Objective
Despite the market’s initial disappointment, the RBI’s decision to close the facility early likely indicates it successfully met its dollar mobilisation goals. The central bank had specific targets for foreign currency inflows.
Data confirms that total inflows facilitated by this mechanism reached $56.8 billion as of August 13. This figure suggests the facility achieved its primary objective before its official expiry date.