RBI Forex Swap Facility

Why in News?

The Reserve Bank of India's (RBI) special USD-INR swap window has attracted over $136 billion in foreign currency through FCNR(B) deposits, OFCBs, and ECBs, significantly exceeding initial projections.

FCNR(B) – Foreign Currency Non-Resident (Bank) Deposits

• Eligibility – Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) may open accounts with authorised Indian banks.
• Currency – Deposits are maintained in designated foreign currencies such as USD, EUR, GBP, and JPY, rather than in Indian rupees.
• Tenure – The typical deposit period ranges from one to five years as a fixed deposit.
• Depositor risk – There is no exchange rate risk, as both principal and interest are repaid in the same foreign currency.
• Taxation and repatriation – Interest earned is tax-free in India for eligible non-residents, and both principal and interest are fully repatriable.

External Commercial Borrowings (ECB)

• Definition – It refer to loans obtained by Indian entities, including companies, Non-Banking Financial Companies (NBFCs), and occasionally Public Sector Undertakings (PSUs), from foreign lenders in foreign currency.
• Uses – ECBs are utilized for capital expenditure, refinancing of existing debt, and working capital requirements, subject to Reserve Bank of India (RBI) guidelines.

OFCB – Overseas Foreign Currency Borrowings

• OFCB – It refer to funds raised in foreign currencies by eligible Indian borrowers.
• Term overlaps with categories of External Commercial Borrowings and treated as an additional foreign currency inflow channel.
• RBI Mechanism – Currency introduced via OFCBs/ECBs may be swapped with Reserve Bank of India.

Reason for introducing RBI’s special USD-INR swap window

• Oil Prices – Increased crude oil imports result in higher demand for US dollars.
• Foreign Portfolio Investors (FPIs) Exit – Heightened risk aversion and changes in global interest rates lead to equity outflows and a reduction in dollar liquidity.
• Dollar Shortage – Domestic foreign exchange demand exceeds available supply.
• Rupee Stress – The currency faces increased depreciation risk and heightened volatility in foreign exchange reserves.

Reference

The Hindu | Forex Swap Window