RBI’s forex swap facility nets over $5 billion

The Reserve Bank of India (RBI) has collected over $5 billion in through the swap facility, launched in September to combat rupee depreciation, governor Raghuram Rajan said on Friday.

"We have got $5.6 billion through swap arrangements" till date, he said on the sidelines of a board meeting. He was replying to questions on measures taken by the RBI to combat rupee depreciation.

The swap facility, announced soon after Rajan took over as RBI governor on 4 September, encourages banks to lure NRI funds to the swap facility.

The swap facility allows banks to swap fresh FCNR(B) dollar funds, mobilised for a minimum tenor of three years, at a fixed rate of 3.5 per cent per annum for the tenor of the deposit.

The swap facility, one of the several steps announced by the RBI and the government, helped the rupee to gain around 9 per cent from its life low of 68.80 and now it seems to be stabilising.

The currency swap facility was meant to exchange the principal and interest in dollars to rupee deposits. It also involves a commitment to reverse the deal at a later date.

FCNR deposits are foreign currency deposits opened by non-resident Indians. These deposits are considered good options for non-resident Indians as they are insulated from currency risks. Foreign banks have rushed to make the most of the cheap dollar-rupee swaps that are offered at 3.5 per cent by the RBI against the market rate of 6 per cent, according to reports.

According to reports, Deutsche Bank was the first to use this facility and had raised $450 million from 10 NRIs. However, if banks continue to use this facility, it could create a bubble that would be detrimental to the Indian economy and the rupee.