Market participants note that significant foreign currency inflows attracted through the Reserve Bank of India's (RBI) preferential swap schemes had a negligible impact on the rupee. This is because the dollars are primarily absorbed by the central bank's reserves rather than entering the spot market.
At the time the scheme launched on June 8, the rupee was valued at $95.71, and by August 21, it closed at the same level. It should be noted that a similar preferential swap scheme in 2013 helped the Indian unit grow by 8.8 percent.
The head of treasury at a private bank explained that the difference from 2013 is that the incoming dollars are not being withdrawn into the system. The rupee continues to follow global trends, and the inflow of funds has not had a substantial impact because for the dollars to have an effect, they must enter the market. The volume of dollars in the system remains virtually unchanged.
Under this program, banks attracting FCNR(B) deposits exchange dollars for rupees with the RBI. This increases the liquidity of the rupee in the banking system, while the foreign currency replenishes the RBI's Foreign Currency Assets (FCA).
According to the latest data, the RBI's special currency-dollar swap facility attracted a total inflow of $72.85 billion as of August 21. Of this amount, $65.40 billion consisted of FCNR(B) deposits (nearly 90 percent of the total volume), and $4.86 billion and $2.59 billion were contributed by Offshore Foreign Currency Bonds (OFCBs) and External Commercial Borrowings (ECBs), respectively.
These inflows have not led to an automatic increase in the supply of dollars in the spot market. Foreign currency may appear in the market if the RBI subsequently releases it through spot intervention or reduces its forward positions.
Madan Sabnavis, chief economist at Bank of Baroda, stated that dollars enter the market only when the RBI returns them to the system, for example, by closing a forward position or through spot intervention. Otherwise, the market operates in a status quo mode or under the influence of other factors determining the exchange rate.
The accumulation of reserves in recent weeks reflects the extent to which these inflows are being absorbed by the central bank. India's foreign exchange reserves grew by $9.9 billion, reaching $716.91 billion by the week ending August 14, which is a cumulative increase of almost $50 billion since the last week of June.
FCA have grown for seven consecutive weeks, increasing by nearly $41 billion in less than two months, rising from $541 billion in the week ending June 26. The validity period of the FCNR(B) swap window expires on August 31, one month earlier than the planned September 30. The validity periods for swaps for ECBs and OFCBs remain open until the end of December.
The RBI emphasized that India's foreign exchange reserves remain sufficient according to standard reserve adequacy ratios, having import coverage of more than 10 months and external debt coverage of 90.8 percent as of July 31, when total reserves stood at $692.9 billion. The reserve situation has since strengthened further.