Indian banks will get greater flexibility to manage dollar inflows raised from non-resident Indians, after the Reserve Bank of India (RBI) allowed them to access its dollar-rupee swap facility more than once a week for larger transactions, 3 currency traders said.
The move comes ahead of the August 31 deadline for the special deposit scheme, which is part of the RBI’s broader effort to attract overseas dollar inflows, strengthen foreign-exchange reserves and support confidence in the rupee.
The scheme has attracted more than $65 billion so far. Banks have been actively raising overseas funds to offer leverage to potential depositors before the scheme closes.
According to the sources, the RBI said through a message on its trading system that banks could use its dollar-rupee swap facility for FCNR (B) deposits outside their assigned weekly window when transactions exceed $100 million.
Banks currently have 1 designated day each week for such swaps with the central bank. Transactions below $100 million will continue to be restricted to that day, according to the RBI message.
The RBI did not immediately respond to an email seeking comment.
The change is aimed at helping banks manage a potential surge in dollar liquidity. More frequent access to the swap facility could allow banks to transfer excess dollars to the RBI instead of holding them until their designated swap day.
The pressure from excess dollar liquidity was visible on Thursday. The 1-day dollar/rupee swap cost rose to as high as 2.5 paisa, compared with around 0.40-0.50 paisa in recent sessions.
Traders said heavy dollar inflows can leave banks with surplus balances that must be rolled over in the overnight swap market until their scheduled RBI swap day. This raises the cost of converting surplus dollars into rupees and can push up costs in the wider forward market.
The 1-month annualised implied hedging cost rose by more than 30 basis points at one stage on Thursday before easing slightly after the RBI’s move.
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