RBI Swaps Attract $72.85B, Rupee Stagnant

The Reserve Bank of India’s (RBI) concessional swap schemes have attracted substantial foreign currency inflows, reaching $72.85 billion by August 21. Despite this significant influx, the Indian rupee has not seen a corresponding strengthening, as these funds were primarily absorbed into the central bank’s foreign exchange reserves.

This outcome presents a notable contrast to a similar scheme implemented in 2013, which saw the rupee appreciate by 8.8 percent. From its launch on June 8 to August 21, the rupee’s value against the dollar held steady at 95.71, largely influenced by global market conditions.

How RBI’s Swap Mechanism Works

Under these schemes, banks convert FCNR(B) deposits into rupees directly with the RBI. This process enhances rupee liquidity within the banking system, while the foreign currency component is simultaneously added to the RBI’s foreign currency assets (FCAs).

• FCNR(B) deposits constituted the majority of inflows, amounting to $65.40 billion.
• Offshore foreign currency bonds (OFCBs) contributed $4.86 billion.
• External commercial borrowings (ECBs) added $2.59 billion to the total.

Why Rupee Stability Persisted

Economists explain that for these dollar inflows to impact the spot market and influence the rupee’s value, the RBI must actively intervene. This intervention would involve releasing the dollars through spot market operations or by reducing its existing forward positions.

Evidence suggests the central bank has primarily absorbed these inflows, bolstering India’s foreign exchange reserves. These reserves increased by $9.9 billion to reach $716.91 billion in the week ending August 14.

• A cumulative increase of nearly $50 billion has been observed in the reserves since late June.
• Foreign Currency Assets (FCAs) alone expanded by approximately $41 billion in under two months.

Scheme Deadlines and Reserve Strength

The FCNR(B) swap window is set to close on August 31, earlier than its initial September 30 deadline. Conversely, the windows for ECBs and OFCBs will remain open until the end of December.

The RBI has affirmed the adequacy of India’s foreign exchange reserves, citing robust metrics. As of July 31, the country maintained an import cover of over 10 months and an external debt cover of 90.8 percent, a position that has since strengthened.

Previously, reserves had reached a record high of $728.49 billion in late February, before the RBI intervened to manage volatility in the rupee. The current absorption of swap inflows underscores the central bank’s strategy to bolster its reserve position.