RBI eases forex exposure rules for banks availing special swap facility

The Reserve Bank of India (RBI) has relaxed foreign exchange exposure norms for banks raising funds under its recently announced concessional swap facility, a move that is expected to encourage lenders and state-run entities to tap overseas markets without breaching regulatory limits.

In a circular issued on Tuesday, the central bank said authorised dealer category-I (AD Cat-I) banks will be allowed to exclude certain hedged foreign currency positions from the calculation of their net overnight open positions (NOP) limits.

The exemption will apply to positions arising from hedged transactions linked to foreign currency non-resident bank or FCNR(B) deposits, external commercial borrowings (ECBs), and overseas foreign-currency borrowings raised under the RBI’s special swap schemes announced earlier this month.

The RBI has ensured that foreign currency borrowings raised under its special funding window will not consume banks’ limited forex exposure capacity, provided the underlying positions are properly hedged.

The NOP limit represents the maximum unhedged foreign exchange exposure a bank can carry. It is used by the central bank to curb excessive currency speculation and ensure financial stability. Banks breaching these limits could face regulatory scrutiny and higher risk from exchange-rate fluctuations.

Tighter oversight

The latest clarification comes against the backdrop of a series of RBI measures to tighten oversight of currency market activity. On 27 March, the central bank capped banks’ net open positions in the domestic market at $100 million at the end of each business day, followed by restrictions on related-party transactions from 1 April.

Market participants had expressed concern that the tighter framework could make it difficult for banks to use the RBI’s newly introduced swap facilities without exhausting their NOP limits.

The move, announced on 5 June as part of a broader package to attract dollar inflows and support the Indian rupee, allows banks to raise fresh and renew existing FCNR(B) deposits of three to five years and swap the dollars with the RBI at a concessional rate. Hedging costs for banks will be zero, effectively removing a major cost that previously prevented them from offering attractive rates on dollar deposits. The scheme is open until 30 September.

The RBI had also announced that it would offer a concessional forex swap facility for ECBs raised by public sector undertakings and Indian banks until 31 December 2026, for maturities of up to five years. The facility effectively absorbs hedging cost of dollar borrowings of 1.5%, allowing eligible entities to access overseas funds at lower overall costs.

For overseas foreign-currency borrowings raised by AD Cat-I banks with maturities between three and five years, the RBI has offered swap transactions at a fixed rate of 1.5% per annum, compounded semi-annually. This is significantly lower than prevailing market hedging costs, with dollar-rupee forward premiums currently slightly above 3% annually.