RBI's US Dollar-Rupee Forex Swap Facility Sees Strong Participation

The RBI’s new US Dollar-Rupee Forex Swap Facility continues to draw strong participation. Over $36.7 billion has been deposited in Indian banks through the FCNR scheme in less than 60 days. The Swap Facility is active from June 8 and runs through September 30. This is a sizeable jump in a short window. By July 31, a total of $40.8 billion has been mobilized, including the FCNR deposits. Even the FCNR(B) outstanding balance has shown a remarkable jump. It rose from $32.5 billion (USD 32,558.5 million) to $60.5 billion (USD 60,548.7 million) — an 86% jump in under two months. Ankur Choudhary, Co-Founder and CEO, Belong, an NRI-focused fintech platform, shares insights from the banking world related to this dollar drive by the government. “Based on customer transactions across multiple banking partners, Belong said the market has evolved significantly since the scheme was introduced. Banks have raised minimum investment thresholds, leveraged returns have moderated as fundraising targets are met, and onboarding timelines have emerged as the biggest practical constraint for investors looking to participate before the window closes,” says Choudhary. According to DD India, RBI Governor Sanjay Malhotra announced that there are no plans to discontinue the FCNR(B) deposit scheme. This, he said, has boosted capital inflows and strengthened the external position. He confirmed the zero-cost swap facility under the scheme will remain operational until its scheduled expiry on September 30, 2026. “The real test isn’t the run-rate so far – it’s the final six weeks. The deposits raised are being swapped for rupee liquidity as they land, and that’s arguably the more durable story for bond markets than the headline dollar number itself,” says Sneha Pandey, Fund Manager -Fixed Income, Quantum AMC. The current differential in rates for FCNR deposits between Indian banks and those available to NRIs in their countries is crucial. This gap drives investor behaviour. In many nations, due to small differentials, investors often opt for loans. Indian banks are permitted to offer leveraging facilities under RBI regulations. This is expected to be a significant influence on total collections, given some banks provide loans worth up to 19 times their capital. GIFT City banks cannot route FCNR(B) deposits but can provide loans to NRI investors, as they are categorized as overseas banks. Only Indian mainland banks are permitted to accept FCNR deposits. Leveraging is now becoming a luxury as several individual banks appear to be on track to meet mobilization targets. “Banks have gradually raised the minimum investment required to access leveraged FCNR(B) deposits. One banking partner that initially accepted customer deposits from US$100,000 now requires a minimum investment of US$1 million. Several other banks have also increased their minimum ticket sizes or become more selective in onboarding new-to-bank customers. The company noted that only a limited number of banks continue to accept investments in the US$100,000-200,000 range, with eligibility criteria continuing to evolve,” says Choudhary. Loans at higher multiples can result in returns up to 20% or higher for NRI investors. But higher global interest rates are creating fresh challenges for leveraging itself. “Leveraged returns have begun to moderate as participating banks near their fundraising targets, coupled with a lack of cheap funds in the current environment of hawkish US Fed stance. While investors were initially able to earn returns in the 13-14% range, yields for new deposits at some banks have declined to around 11-12%, reflecting tighter spreads and lower leverage availability,” informs Choudhary. The 2013 campaign raised roughly $26 billion, which has since been surpassed, with a total FCNR collection of nearly $36.7 billion, with two months remaining till the scheme ends. At the time the RBI announced this facility, the banking industry anticipated up to $80 billion in FCNR(B) deposits. Going by the current pace of inflows, that sum is expected to be exceeded by the time the plan expires on September 30. “The FCNR drive is useful because it gives policymakers some breathing room during a period of currency and external-sector pressure. We have seen similar measures help countries during periods of stress in the past. Japan, for instance, has used currency-support measures during difficult periods, including around the 1998 Asian currency crisis and the 2011 earthquake. For India, the most important thing to remember is that FCNR inflows can buy time, but they can’t replace stronger economic foundations. How well the measure works in the middle term will depend on whether or not this time it is used to fix the underlying macroeconomic problems,” says Anand K Rathi, Co-Founder of MIRA Money. : This article is for informational purposes only and does not constitute financial, investment, or legal advice. Data and estimates cited are sourced from publicly available reports and expert statements. Readers are advised to consult a qualified financial advisor before making any investment decisions. The publication does not guarantee the accuracy, completeness, or timeliness of the information and is not liable for any losses arising from its use.