The Reserve Bank of India (RBI) has announced a strategic move to absorb foreign exchange risks, a decision expected to significantly boost overseas fund inflows by approximately $50 billion. This initiative aims to attract more foreign currency through Foreign Currency Non-Resident Bank (FCNR-B) deposits and External Commercial Borrowings (ECBs).
RBI's Strategic Forex Risk Absorption
The RBI will not charge any premium for swapping dollars raised through FCNR(B) deposits, effectively absorbing the entire forex risk. This allows banks to offer higher returns to Non-Resident Indians (NRIs), creating an arbitrage opportunity by borrowing abroad and investing in India.
- FCNR(B) deposits: Exempt from cash reserve ratio and statutory liquidity ratio, reducing mobilization costs.
- ECB Swap Cost: Set at 1.5% per annum, making overseas loans attractive for top-rated public sector undertakings (PSUs).
Regulatory Adjustments and Timelines
The RBI's latest window sidesteps previous regulatory constraints by keeping dollar swap deals outside net open position limits. This encourages participation without affecting balance sheet caps.
- FCNR(B) Swap Window: Open until October 16, 2026, for deposits mobilized up to September 30.
- ECB and OFCB Swap Facility: Available until January 15, 2027, for drawdowns up to December 31, 2026.
Impact on Public Sector Undertakings
RBI Governor Sanjay Malhotra emphasized that the concessional swap window is limited to PSUs, ensuring benefits are widely dispersed to the public through utilities and infrastructure projects.
"Benefits to PSUs are passed on to the general public because they are catering more to utilities and infrastructure," said Malhotra.
Mechanism and Compliance
The RBI will charge a fixed premium of 1.5% per annum, compounded semi-annually, on swaps linked to ECBs and OFCBs. Authorized dealer category-I banks will manage the transactions, selling dollars to RBI at the prevailing FBIL reference rate and returning rupee funds at maturity.
| Instrument | Swap Cost | Premium | Maturity |
|---|---|---|---|
| ECBs & OFCBs | 1.5% p.a. | Compounded semi-annually | Until Jan 15, 2027 |
The RBI's policy ensures that forex exposures from these swaps do not impact regulatory limits under FEMA guidelines, providing banks with balance sheet comfort.
Conclusion
This strategic move by the RBI is poised to enhance India's foreign currency reserves and support economic growth by facilitating cheaper access to overseas funds for public sector projects.
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