Mumbai: The Reserve Bank of India’s (RBI) newly announced forex swap facilities are expected to provide significant support to the banking sector by improving liquidity, strengthening deposit mobilisation and helping stabilise the rupee over the coming quarters.
The twin measures, aimed at attracting foreign currency inflows and enhancing the availability of funds within the banking system, have already prompted banks to raise interest rates on foreign currency deposits to attract overseas investors and non-resident Indians (NRIs).
RBI introduces special forex swap facilities
Under the RBI’s new framework, operational from June 8 to September 30, 2026, banks can mobilise Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits with tenors ranging from three to five years and swap the proceeds into rupees without incurring hedging costs.
In addition, these deposits have been exempted from the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements, making the scheme more attractive for banks.
Industry experts note that the latest facility offers more favourable terms than a similar scheme introduced in 2013, when the RBI charged banks a 3.5 per cent hedging fee.
Banks raise FCNR deposit rates
Following the RBI announcement, several banks have increased FCNR(B) deposit rates by 200 to 300 basis points, taking returns to around 6 to 7 per cent.
Banks are effectively passing on the benefit of zero-cost hedging to depositors, making FCNR deposits more competitive and attractive for NRIs looking to invest surplus funds in India.
Analysts believe the improved economics could encourage higher foreign currency inflows during the coming months, particularly during the traditionally strong remittance season of July and August.
Benefits for banks and depositors
The revised scheme is being viewed as beneficial for both depositors and banks.
Market estimates suggest leveraged NRI investors could potentially earn annual returns ranging between 15 per cent and 26 per cent under certain structures.
For banks, FCNR-backed lending is expected to provide an additional spread benefit of around 60 to 65 basis points compared with conventional wholesale deposits.
The improved funding profile could help lenders expand their loan books while maintaining healthy margins.
Concessional borrowing facility offers further relief
Alongside the FCNR(B) scheme, the RBI has introduced a concessional swap facility for external commercial borrowings and overseas foreign currency borrowings.
The facility, available until December 2026, allows banks to hedge overseas borrowings at a flat cost of 1.5 per cent per annum.
This compares favourably with prevailing market hedging costs of around 3.5 to 4 per cent, providing a benefit of approximately 200 to 250 basis points on incremental overseas borrowing costs.
Banking sector observers believe the measure could encourage lenders to access international funding markets more actively.
Foreign investment trends add importance
The RBI’s move comes at a time when foreign institutional investors (FIIs) have remained net sellers in Indian financial markets.
Since calendar year 2024, FIIs have reportedly withdrawn around USD 45 billion from Indian equities, resulting in reduced holdings in several large private-sector banks.
Analysts say improved liquidity, stronger foreign currency inflows and greater stability in the rupee could help offset some of the pressure created by foreign capital outflows.
Lessons from the 2013 scheme
The RBI’s 2013 forex swap programme is widely regarded as a successful intervention during a period of currency volatility.
That initiative attracted approximately USD 27 billion in FCNR(B) deposits and total inflows of around USD 34 billion. The inflows helped strengthen foreign exchange reserves and contributed to a 3.4 per cent appreciation of the rupee within a year.
India’s forex reserves continued to rise over the following three years, increasing by a cumulative USD 68 billion.
While the interest rate differential between India and the United States is narrower today than it was in 2013, analysts believe the current scheme still offers attractive incentives for investors.
RBI expects substantial inflows
The central bank has projected total inflows of USD 40 billion to USD 50 billion during FY27 from the combined forex swap measures.
Financial experts believe the success of the programme will depend largely on how effectively banks utilise the additional liquidity to expand lending while maintaining prudent risk management.
Institutions with strong overseas networks and established NRI customer bases are expected to be among the biggest beneficiaries of the scheme.
RBL Bank seen as a potential beneficiary
Among private-sector lenders, RBL Bank is viewed as one of the institutions that could benefit from the improving liquidity environment.
Analysts have also highlighted the proposed open offer by Emirates NBD as a potential positive development that could strengthen the bank’s capital position, support future loan growth and lower funding costs.
The bank reported healthy growth in advances and deposits during the fourth quarter of FY26, while profitability improved due to lower tax expenses.
Management has guided for loan growth exceeding 20 per cent in FY27, supported by expansion in secured retail lending and moderating credit costs.
Market observers believe improving balance sheet strength, stronger return ratios and potential strategic synergies could support the bank’s medium-term growth prospects.
Conclusion
The RBI’s forex swap initiatives are expected to provide a significant liquidity boost to the banking sector while supporting the rupee and attracting foreign currency inflows. With banks already responding by raising FCNR deposit rates, the measures could improve funding conditions, strengthen credit growth and contribute to greater financial stability in the months ahead.