RBI mulls low-cost swap lines to lure deposits from overseas Indians

Move would reduce the hedging cost for banks

Reserve Bank of India (RBI) has sounded out lenders on offering forex swap lines at below-market rates for banks raising deposits from non-resident Indians as it considers ways to attract funds to support the battered rupee, several bankers with direct knowledge of the discussion told Reuters.

At a Monday meeting that included RBI Deputy Governor H R Khan and executives from foreign banks in India, a proposal was discussed under which the central bank would look into buying back the dollars by providing a forward swap line at a discount for three to five years, they said.

That would reduce the hedging cost for banks to raise dollars overseas and convert them into rupees in India.

"The RBI seems to be looking at offering banks swap lines at below-market rates to mitigate the high cost of hedging right now," said a banker present in the meeting at the RBI.

"They want banks to take dollar deposits and lend them as rupees via a swap. That's expensive right now, so if the RBI offers it cheaply the banks can then pass the savings on as higher deposit rates to attract NRIs," the banker said.

The RBI last month deregulated interest rates on non-resident external (NRE) rupee deposits, under which banks raise dollar deposits and convert them into rupees. However, a weakening rupee increases the hedging cost on such deposits, discouraging banks from promoting them on a big scale.

"I wasn't sure if they were making us an offer of cheap swap lines or sounding us out about the idea but I got the sense they wanted to announce something in one or two days," the banker said.

An RBI spokeswoman could not immediately be reached for comment.