RBI reiterates FCNR (B) swap maturities provided

The bank will take all necessary measures to even out the resultant rupee liquidity gaps through use of appropriate instruments, says RBI

Photo: Abhijit Bhatlekar/Mint
Photo: Abhijit Bhatlekar/Mint

Mumbai: Seeking to alleviate worries that the liquidity deficit could increase significantly from September this year, the Reserve Bank of India reiterated that it has adequately provided for the maturity of foreign currency non-resident bank deposits (FCNR-B) and the related swaps that banks entered into with the central bank.

“The Reserve Bank is actively monitoring the ongoing market developments and is in readiness to contain the associated market volatility, if any, in relation to completion of swap transactions as well as the concomitant changes in rupee liquidity. Further the Bank will take all necessary measures to even out the resultant rupee liquidity gaps through use of appropriate instruments,” said the central bank in a circular on Wednesday.

In September 2013, to shore up foreign exchange reserves and stabilize a rapidly weakening rupee, the RBI had introduced a special scheme under which commercial banks were asked to raise three-year FCNR (B) deposits and swap the dollars with the RBI at a fixed swap rate of 3.5%. The central bank had garnered about $32 billion through the scheme.

These swaps will mature beginning September this year and bankers have said that this could lead to a drain in rupee liquidity.

The RBI said that these swaps are adequately covered by its forward dollar purchases. The central bank has been buying dollars in the forward market consistently which has brought down its net forward position to -$2.4 billion as of February from a high of -$32.55 billion in November 2013.

“Since the forward purchases are largely front-running the FCNR(B) swaps with regard to maturity, the foreign exchange reserves will, in all likelihood, witness significant accretions initially to be followed by depletions of more or less similar magnitude around the time these deposits mature,” the RBI added.

On 5 April, governor Raghuram Rajan said that the RBI has plenty of reserves to curb any volatility in the exchange rate due to the maturity of FCNR (B) swaps adding that banks would figure out how to compensate for the reduction in their deposit base due to these maturities.