No early closure of FCNR (B) swap window: RBI Governor Sanjay Malhotra

Governor Sanjay Malhotra says mobilisation under the concessional FCNR(B) swap window remains robust, with no proposal to close the scheme before its September 30 deadline

The Reserve Bank of India (RBI) is not considering any proposal to prematurely close its concessional swap window for foreign currency non-resident (bank) [FCNR (B)] deposits, Governor Sanjay Malhotra said on Wednesday, adding that the liquidity generated by the strong inflows would be temporary and absorbed by the economy’s normal funding requirements.

 

“We have got robust flows. We do hope to get healthy flows going forward. But there is no proposal under consideration to close the scheme prematurely,” Malhotra said at the post-monetary policy press conference. He added that the RBI had no mobilisation target under the scheme.

 

Banks have mobilised nearly $41 billion under the concessional swap window as of July 31, according to RBI data. Of the total inflows, $36.7 billion came through FCNR (B) deposits, $2.57 billion via overseas foreign currency borrowings (OFCBs) and $1.5 billion in external commercial borrowings (ECBs).

 

 

Malhotra also said that the banking system’s liquidity surplus could peak around September before being absorbed through higher currency in circulation, rising reserve requirements as deposits grow and the maturity of foreign exchange forward contracts.

 

“Liquidity may be in surplus for a very short term. It may peak in Q2 around September, and going forward it should get absorbed because of our normal needs of the economy through increase in currency in circulation, higher requirements for reserves because of deposit growth. We also have some forward positions, which are getting matured,” he said.

 

The liquidity created would not be “extraordinary” or “substantial”, Malhotra said, noting that the RBI injects similar levels of liquidity every year through open market operations and foreign exchange swaps. The eventual liquidity impact would depend on the amount mobilised under the scheme.

 

Asked whether the additional liquidity was intended to support credit growth and demand, Malhotra said the RBI’s liquidity operations were aimed at aligning the weighted average call rate (WACR) with the policy repo rate.

 

“The kind of liquidity that we will give out will depend on what is the policy repo rate. And what the policy repo rate will be determined by the growth and inflation dynamics, where your demand also comes in,” he said.

 

He added that the RBI would continue to proactively conduct two-way liquidity operations to ensure adequate liquidity in the banking system while keeping the WACR aligned with the policy repo rate.

 

The banking system's liquidity surplus, measured by the average daily net position under the liquidity adjustment facility (LAF), averaged ₹1 trillion since the June policy meeting, while the WACR averaged 5.31 per cent, remaining within the policy corridor. Short-term money market rates, including commercial paper and certificate of deposit rates, moderated in July, while government security yields eased across maturities following measures announced by the government and the RBI to attract foreign capital into the debt market.

 

Government data showed net FCNR (B) inflows of $28 billion as of July 30. Private sector banks mobilised $10.73 billion, public sector banks $8.84 billion, foreign banks $8.37 billion, while small finance and cooperative banks together accounted for around $50 million.

 

Among individual lenders, HSBC mobilised the highest FCNR (B) deposits at $6.14 billion, followed by State Bank of India ($4.12 billion) and ICICI Bank ($3.70 billion). Other major contributors included Standard Chartered Bank ($1.86 billion), Kotak Mahindra Bank ($1.66 billion), Axis Bank ($1.59 billion) and HDFC Bank ($1.41 billion).

 

HSBC said the RBI’s comments suggested it was unlikely to resort to durable liquidity-draining measures such as open market operation (OMO) sales and cash reserve ratio (CRR) hikes. SBI Research has estimated FCNR (B) mobilisation could reach $65-70 billion by the September 30 deadline. Including ECB and OFCB inflows, total mobilisation under the swap window could reach $80-85 billion, it said.