India central bank ends dollar swap facility early on $52 billion inflow surge

The Reserve Bank of India will close its special swap facility for Foreign Currency Non-Resident (Bank) deposits on August 31, cutting the programme short by a month due to an overwhelming market response. Banks will have until September 11, 2026, to execute the final swaps with the central bank under the accelerated timeline.

Operationalised on June 8, the zero-cost hedging facility allowed commercial lenders to swap eligible overseas borrowings at highly concessional rates. This mechanism significantly lowered dollar funding costs for banks and was specifically designed to rapidly accelerate foreign capital inflows to bolster national foreign exchange reserves.

The early closure follows a massive and rapid surge in incoming capital. Total foreign inflows generated by the central bank's special measures reached $56.84 billion by August 13, representing a sharp increase from the $40.81 billion recorded just two weeks prior at the end of July.

Foreign currency non-resident deposits drove the vast majority of this capital accumulation, accounting for $52.30 billion of the total inflows. By contrast, dollar inflows from external commercial borrowings and overseas foreign currency borrowings remained comparatively modest at $1.74 billion and $2.80 billion respectively.

Despite the early termination of the deposit swap window, the central bank confirmed that parallel support mechanisms will remain in place for corporate borrowers. The distinct swap scheme targeting external commercial borrowings and overseas foreign currency borrowings will continue operating until its original December 31 deadline.

This aggressive capital accumulation has materially strengthened the country's external financial buffers against global volatility. Foreign exchange reserves climbed by $14.1 billion to hit $707 billion in the week ended August 7, marking the highest reserve level recorded so far this fiscal year.

The decision to withdraw the subsidy early reflects a broader shift in the domestic macroeconomic landscape. Policymakers faced growing questions regarding the necessity of continuing to subsidise dollar funding given that national reserves are substantially higher today than during the 2013 taper tantrum that originally prompted the scheme.

Central bank officials had previously signaled a willingness to let the facility run its full course without intervention. However, the sheer volume of incoming capital ultimately satisfied policymakers ahead of schedule, with official Malhotra confirming the programme had fully achieved its strategic goals.

When asked if the capital surge had successfully met the central bank's strict objectives regarding the balance of payments, domestic liquidity, and overall reserve adequacy, Malhotra stated that the measures had succeeded. "Yes, as of now, it has ticked all the boxes," he said.