Reserve Bank of India Cuts Forex Deposit Incentive Deadline, Surprises Markets

The Reserve Bank of India (RBI) announced on August 14 that it would terminate its special forex swap facility for Foreign Currency Non-Resident (Bank) deposits, known as FCNR(B), effective August 31, instead of the previously scheduled September 30. This abrupt decision caught many off guard, especially since RBI Governor Sanjay Malhotra had assured just days prior that there were no plans to end the scheme early.

The RBI launched this zero-cost forex swap facility on June 8, aimed at attracting foreign-currency deposits with maturities ranging from three to five years. The initiative was designed to bolster India’s external financial position and support the rupee amid ongoing global economic challenges. Remarkably, by August 13, the program had successfully attracted $52.3 billion in FCNR deposits alone within just 67 days.

In addition to the FCNR deposits, the total inflows reached approximately $56.85 billion, including $1.7 billion from external commercial borrowing swaps and $2.8 billion from overseas foreign currency borrowings. This swift mobilization exceeded initial projections, which estimated total inflows between $50 billion and $80 billion over the full duration of the program.

However, the early termination of the incentive has raised concerns about the RBI's credibility, especially given the conflicting statements from its governor. Bankers in India are now hurrying to secure NRI dollar deposits before the August 31 cutoff. Notably, while the FCNR facility is closing, the swap facilities for external commercial borrowings and overseas foreign currency borrowings will remain open until the end of the year.

The influx of funds has provided significant support to the rupee, but the situation highlights a critical lesson for central banks: successful policy execution does not compensate for poor communication. While the RBI achieved its goal of strengthening India’s external position, the credibility hit from this abrupt policy shift may have lasting implications.