Record $127.2 billion FCNR(B) inflows power RBI’s $136.4 billion forex mobilisation

The Reserve Bank of India’s special foreign-exchange mobilisation drive has attracted a massive $136.37 billion in less than three months, with Foreign Currency Non-Resident (Bank) deposits alone accounting for a record $127.22 billion, according to provisional RBI data released on Wednesday.

The latest figures are significantly higher than the $100-billion level reported earlier in the day and underline the sharp acceleration in deposits during the final days of the window. FCNR(B) inflows stood at $65.4 billion on August 21, implying that nearly $62 billion was mobilised in the final 10 days before the window closed on August 31.

Besides FCNR(B) deposits, Overseas Foreign Currency Borrowings contributed about $5.26 billion, while External Commercial Borrowings brought in around $3.89 billion, taking overall mobilisation under the special measures to more than $136 billion.

Reserves hit record high

The unprecedented dollar inflows have strengthened India's external buffers at a time when the rupee has been under pressure from elevated crude oil prices, foreign capital outflows and global financial volatility. India’s foreign-exchange reserves had already climbed to an all-time high of $729.33 billion in the week ended August 21. The latest inflows are expected to push the reserve stock further higher as additional deposits are swapped with the central bank.

The RBI has also stepped up intervention in the foreign-exchange market in recent sessions. The rupee strengthened beyond the 95-per-dollar level this week to touch a two-month high despite pressure from rising oil prices and US Treasury yields. The larger reserve cushion provides the central bank greater capacity to sell dollars when necessary to contain excessive volatility in the domestic currency.

Window closed early

The RBI introduced the special USD-INR forex swap facility on June 8, covering FCNR(B) deposits, external commercial borrowings and overseas foreign currency borrowings.

Under the FCNR(B) arrangement, NRIs can place deposits with Indian banks in foreign currencies such as the US dollar. The principal and interest are repaid in foreign currency, protecting depositors from fluctuations in the rupee.

The special swap mechanism substantially reduced the currency-hedging burden on banks and encouraged them to mobilise overseas deposits aggressively.

The response proved so strong that the RBI advanced the closing date for eligible FCNR(B) deposits from September 30 to August 31. Banks can, however, use the swap facility until September 11 for eligible deposits already contracted.

The facilities covering ECBs and OFCBs are scheduled to remain available until December 31.

Far exceeds expectations

The scale of mobilisation has substantially exceeded initial projections. When the facility was introduced, banking-sector estimates had generally envisaged FCNR(B) mobilisation of around $40-50 billion.

The $127.2-billion mobilisation is also several times the amount raised during the RBI’s comparable 2013 FCNR(B) programme, which attracted roughly $25 billion as India confronted severe pressure on the rupee.

The latest inflows could provide a substantial cushion for India's balance of payments and help finance the current-account deficit. However, the large swaps will also inject considerable rupee liquidity into the banking system, potentially requiring the RBI to absorb excess liquidity through other monetary instruments.