Strong inflows via RBI's swap schemes lift reserves, fail to boost rupee

As RBI largely maintains hands-off approach to intervention

Large inflows of foreign currencies mobilised through the Reserve Bank of India’s (RBI’s) concessional swap schemes have had little impact on the rupee because the dollars have largely been absorbed into the central bank’s reserves instead of being released into the spot market, according to market participants.

 

The rupee was at 95.71 a dollar on June 8, when the scheme was launched, and closed at the same level on August 21.

 

A similar concessional swap scheme in 2013 helped the Indian unit gain 8.8 per cent.

 

“The difference from 2013 is that the dollars coming in this time are not being released into the system. The rupee is still tracking global cues. The flows have done little to nothing because the dollars have to hit the markets for them to have an impact. The amount of dollars in the system is essentially the same,” said the treasury head at a private bank.

 

 

Under the facility, banks raising deposits under Foreign Currency Non-Resident (Bank), or FCNR (B), swap dollars with the RBI for rupees. This increases rupee liquidity in the banking system, while the foreign currency is added to the RBI’s foreign-currency assets (FCAs).

 

The RBI’s special dollar-rupee forex swap facility attracted inflows of $72.85 billion as of August 21, according to the latest data, of which FCNR (B) deposits accounted for $65.40 billion (nearly 90 per cent of the total) while offshore foreign currency bonds (OFCBs) and external commercial borrowing (ECB) contributed $4.86 billion and $2.59 billion, respectively.

 

The inflows did not automatically increase the supply of dollars in the spot market. The foreign currency can enter the market if the RBI subsequently releases it through spot intervention or by reducing its forward positions.

 

“Only when the RBI puts the dollars back in the system, by maybe squaring off their forward position or spot intervention, can dollars enter the market. Otherwise, the market is operating on the status quo or on other factors that are driving the currency,” said Madan Sabnavis, chief economist, Bank of Baroda.

 

The buildup in reserves in recent weeks reflects the extent to which the inflows have been absorbed by the central bank.

 

India’s foreign-exchange reserves rose by $9.9 billion to $716.91 billion in the week ended August 14, taking the cumulative increase to nearly $50 billion since the last week of June.

 

FCAs have risen for seven consecutive weeks, gaining nearly $41 billion in less than two months from $541 billion in the week ended June 26.

 

The FCNR (B) swap window will close on August 31, a month earlier than the previously scheduled September 30. The swap windows for ECB and OFCBs will remain open until the end of December.

 

The RBI has said that India’s foreign-exchange reserves continue to be adequate with import cover of over 10 months and external debt cover of 90.8 per cent, as on July 31, when total reserves were $692.9 billion. The position has further strengthened since then.

 

Foreign-exchange reserves had hit a record $728.49 billion in the week ended February 27 before declining as the RBI intermittently sold dollars to curb excessive volatility in the rupee.