The Reserve Bank of India (RBI) has advanced by a month the closure of its special FCNR(B) deposit swap facility after inflows crossed over $50 billion, a move which has confused currency traders.

The surprise announcement came nine days after RBI Governor Sanjay Malhotra said that the concessional swap facility will run its course despite indications of strong foreign currency non-resident (Bank), or FCNR(B), deposit inflows. There was no proposal to prematuredly withdraw the swap facility. Malhotra was replying to a media query at the policy press conference.

Banks will thus be allowed the swap facility on FCNR(B) deposits raised by 31 August, and not until 30 September as was announced by the RBI earlier.

The central bank said the decision to curtail the period was taken "based on the encouraging response to the swap facility for FCNR(B) deposits and the resultant forex inflows".

As per the RBI, banks had raised $52.3 billion via FCNR deposits between 8 June and 13 August. The central bank had announced the swap facility on 5 June but operationalised the window from 8 June to bolster India’s balance of payments and the rupee.  

Banks had also raised $1.7 billion via swap facilities for external commercial borrowings (ECBs) and $2.8 billion through overseas foreign currency borrowings (OFCBs). 

The RBI has left the swap windows for ECBs and OFCBs undisturbed, allowing it to open until 31 December.

Altogether, the concessional swap facility had attracted $56.85 billion in foreign-currency inflows. This amount go up to $70-$80 billion according to analysts, making the RBI think that enough dollars had been raised and the foreign-exchange reserves had recovered sharply to be at $707.002 billion in the week ended 7 August.

The central bank may also have thought that there was no need to take on further liabilities as it would have had to bear the hedging cost under the swaps.

The attention will now shift to the rupee and forex traders would monitor its behaviour closely after the RBI announced the premature closure of the swap facility for FCNR(B) deposits.