RBI's Decision on FCNR (B) Swap Facility
The Reserve Bank of India (RBI) made an unexpected move by ending the swap facility for foreign currency non-resident (bank) FCNR (B) deposits a month ahead of schedule. This was initially announced on June 5, alongside facilities for external commercial and overseas foreign-currency borrowings.
Mobilization and Response
- Foreign currency worth $56.85 billion was mobilized by August 13, with FCNR (B) deposits contributing $52.3 billion.
- The RBI cited an encouraging response as the reason for ending the swap facility prematurely.
Concerns and Implications
The decision raises questions about the planning and expectations of the scheme.
- India's foreign-exchange reserves were about $680 billion at the scheme's announcement, with no immediate external obligation issues.
- External pressures included increased crude oil prices due to the Iran war and a potentially expanding current account deficit (CAD).
- Foreign portfolio investor selling added pressure to the capital account amid global uncertainties.
Objectives and Outcomes
- The scheme aimed to bolster foreign-exchange reserves and stabilize the currency market, discouraging speculative activities.
- Analysts anticipated $80 billion-100 billion under various swap windows, but the actual mobilization fell short.
- Potential downsides included artificial rupee appreciation and increased system liquidity.
Policy Planning Concerns
Questions arise regarding the RBI's expectations and policy planning:
- The announcement and premature withdrawal suggest inadequate policy planning.
- The change in stance within nine days of a post-monetary policy press conference indicates potential mismanagement.
Macroeconomic Context
The broader macroeconomic issues persist despite fund mobilization:
- India's CAD requires foreign savings to boost investment, with foreign direct investment (FDI) being the most stable form.
- India's net FDI was $7.8 billion, with a balance of payments (BoP) deficit of $8.1 billion in the first quarter of the financial year.
- The country needs to attract more long-term capital to stabilize the external account and currency market.
