RBI’s FCNR(B) Swap Window – A Massive Inflow The Reserve Bank of India (RBI) opened a special FCNR(B) swap window that has attracted **$136.4 bn** in foreign‑currency deposits in just about three months. The inflow has bolstered India’s external position, expanding the RBI’s balance sheet by **Rs 5.4 lakh crore** since the end of May.
Revised Balance‑of‑Payments Outlook Bank of America (BofA) Securities, analysing the scale of the inflows, has **raised its FY27 balance‑of‑payments surplus forecast to $90 bn** (about 2.2 % of GDP) from the earlier $45 bn estimate. The surplus is expected to ease to **$50 bn (1.1 % of GDP) in FY28** as capital flows normalise.
Implications for Foreign‑Exchange Reserves BofA projects that India’s foreign‑exchange reserves will **cross $750 bn soon**, reaching **$775 bn in FY27** and **$800 bn in FY28**.
Domestic Liquidity and Credit Expansion The key domestic concern is how the foreign inflow translates into Indian‑rupee liquidity: - **Base‑money impact:** BofA estimates up to **Rs 12 lakh crore ($125 bn)** could enter the banking system. - **Money‑multiplier effect:** With a multiplier of roughly four, this could generate **Rs 30‑45 lakh crore** of broad‑money. - **Bank credit:** Of that, **Rs 25‑40 lakh crore** may become additional non‑food bank credit – roughly **7‑11 % of GDP** and **11.5‑18 % of existing non‑food credit**. - **Growth boost:** The extra credit could lift GDP growth by **50‑80 basis points**.
Macro‑Economic Risks While the credit surge can support growth, it also carries risks: - **Inflation:** Stronger credit growth may add **0.3‑0.5 percentage points** to core inflation over the medium term. - **Current‑account pressure:** Higher domestic demand could widen the current‑account deficit by a similar **0.3‑0.5 % of GDP**.
Immediate Impact on Banks FCNR(B) deposits are cheaper than domestic term deposits (5.25‑6 % vs 6.5‑7.5 %). They also enjoy **exemption from CRR and SLR**, lowering banks’ funding costs. Consequently, **12‑month CD rates have slipped to 6.75‑7 %**, easing pressure on banks’ wholesale borrowing costs.
RBI’s Cost‑Benefit Assessment BofA argues that concerns over RBI losses on the swap are overstated: - **Hedging cost:** Estimated at **2.8‑3 %** annually. - **Yield on acquired reserves:** Around **4‑4.25 %** in short‑duration US debt and **~4.5 %** for five‑year holdings. - **Net carry:** A positive carry of roughly **100‑170 basis points**. - **Profit scenario:** If the rupee stays stronger than **Rs 105‑110 per dollar** in FY29‑FY31, RBI could record an outright profit.
Historical Perspective During the 2013 currency stress, FCNR(B) deposits rose from **$15 bn to $39.3 bn** by November, later falling to **$21 bn in 2016** – indicating that only about a quarter of the inflow was retained permanently. This suggests the current boost is largely temporary, and India will still need **~$100 bn of net investment capital annually** once the swap’s effect normalises.
--- *The analysis is based on BofA Securities’ research and RBI data as reported in the source material.*