India's RBI gives banks more flexibility in swapping overseas dollar deposits

MUMBAI: The Reserve Bank of India told banks on Thursday they could swap dollars raised from non-resident Indians more than once a week, three currency traders said, giving them flexibility to handle large inflows before its subsidised deposit scheme ends.

The sources requested anonymity since they are not authorised to speak to the media.

The move comes days before the August 31 deadline for a special deposit scheme, a key part of the RBI’s broader effort to draw in overseas dollar inflows, to strengthen its foreign-exchange buffers and bolster confidence in the rupee.

The scheme has so far drawn over $65 billion and banks have rushed to raise overseas funds to provide leverage to potential depositors before the scheme closes.

The banker sources said that in a message on its trading system, the RBI said banks could access its dollar-rupee swap facility for FCNR (B) deposits outside their weekly window for transactions above $100 million.

India RBI’s heavy FX footprint revives memories of a tightly managed Indian rupee

Banks are currently assigned one day a week for such swaps with the central bank. Transactions below $100 million will remain limited to that day, the RBI said in the message.

The central bank did not immediately respond to an email seeking comment.

One of the sources said the move was aimed at helping banks manage a likely surge in dollar liquidity.

By allowing banks to access the swap facility more frequently, the RBI could enable them to offload excess dollars to it rather than holding them until their designated weekly swap day, containing the fallout of the sudden build-up of dollar liquidity.

The impact of a build-up in excess dollars was evident on Thursday, when the one-day dollar/rupee swap cost surged to a high of 2.5 paisa, far above the roughly 0.40-0.50 paisa seen in recent sessions.

Traders explained that a surge in inflows can leave banks with excess dollar balances that they have to roll over in the overnight swap market until their designated day to access the RBI’s swap facility.

Indian central bank’s FX forward book shrinks slightly to $103.3 billion

That drives up the overnight cost of converting surplus dollars into rupees, with the pressure spilling over into the broader forward market and lifting hedging costs.

The one-month annualised implied hedging cost jumped by more than 30 basis points at one stage on Thursday before retreating slightly after the RBI’s move.