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Commerzbank analysts describe how the Reserve Bank of India’s (RBI) early closure of the FCNR(B) swap window follows strong FX inflows and rising liquidity costs. The move removes a source of bond demand and rupee liquidity, while RBI’s larger reserves and forward book reduce the need for further liabilities. USD/INR remains range-bound, with intervention containing volatility and depreciation risks.
FCNR window closure and INR outlook
“The Reserve Bank of India (RBI) announced that it will close its concessional FX swap facility for FCNR(B) deposits on 31 August, a month ahead of the original 30 September deadline. RBI attributed the early closure to the “encouraging response to the swap facility for FCNR(B) deposits and the resulting FX inflows”. As of 13 August, the facility had attracted USD52.3bn.”
“The decision was unexpected and surprised markets as RBI Governor Sanjay Malhotra had said just over a week earlier that there was no proposal to close the scheme prematurely. Measures to support inflows via overseas foreign currency borrowing (OFCB) and external commercial borrowing (ECB) remain in place until 31 December.”
“The early termination likely reflects a combination of diminishing benefits and rising liquidity and balance-sheet costs. The FCNR(B) inflows generated substantial rupee liquidity, part of which flowed into government bonds and helped compress yields, particularly at the shorter end and belly of the curve. The early closure therefore removes a source of incremental liquidity and bond demand.”
“The decision therefore looks more like a cost-benefit recalibration than a signal that the RBI has become outright bullish on INR.”
“In FX, USD/INR rose 0.2% to 95.61 yesterday following RBI’s surprise decision to end the FCNR(B) facility early. The pair has remained broadly range-bound between 94.70-96.70 since early July, with RBI intervention helping suppress volatility.”
“Near-term INR headwinds could come from higher precious metal imports, with gold prices rising and reports suggesting that 400 tonnes of silver import licenses have been approved.”
