RBI will shut the FCNR swap on 31 August after $72.8 billion

The Reserve Bank of India will stop taking fresh FCNR(B) deposits into its special dollar-rupee swap on 31 August.

The window opened on 8 June. It was meant to run to 30 September. Banks can still swap deposits already raised, with the RBI, until 11 September. The ECB and OFCB legs stay open until 31 December.

RBI data out on Saturday put total foreign-currency inflows under the facility at $72.8 billion as of 21 August. FCNR(B) deposits were $65.4 billion of that. Overseas foreign-currency borrowings were $4.9 billion. External commercial borrowings were $2.6 billion.

The rush sped up. The pot was $40.8 billion on 31 July, $56.9 billion on 13 August, then $72.8 billion eight days later. Banks added $32 billion in three weeks. FCNR alone rose $13.1 billion in the latest week, after $15.6 billion the week before.

HSBC, SBI, ICICI Bank and HDFC Bank have led the mop-up. Public-sector banks, SBI aside, have been slower.

The RBI said the early close followed an "encouraging response" and the forex that came with it. Fresh three-to-five-year FCNR deposits get a concessional USD-INR swap at par, plus CRR and SLR relief. The bank sells dollars to the RBI and buys them back later at the same rate. Currency risk sits with the central bank.

The Times of India said the inflows helped reserves rise nearly $10 billion in the week ended 15 August. Bankers told the paper reserves could pass the $728 billion record by month-end.

In plain English: the RBI wanted extra dollars so it could defend the rupee. It paid banks to fetch them. The deal was simple. Bring in three-to-five-year deposits from Indians abroad. The central bank would take the currency risk for free. Banks piled in. The pot filled faster than Mint Street wanted.

Too much of this money is a problem, not a prize. These dollars are rented, not owned. They can leave when the free hedge ends. While they sit here they also turn into cheap rupees in the banks. That can push prices up, which is the other job the RBI is meant to fight.

So the early close is the RBI saying it has enough borrowed dollars for now. It would rather not keep buying more.

NRI deposits are not the same as lasting FDI. For now they have filled the tank. That lets the RBI defend the rupee without looking desperate. The leftover ECB and OFCB windows are smaller, and slower. The party that mattered was FCNR.

Banks have until 31 August to book more deposits, and until 11 September to swap them. After that, watch whether the $65.4 billion stays when the hedge is no longer free. The explainer in this issue is about why the RBI called time.