The encyclopedia · Finance & Accounting · Financial decision · 2013
RBI's FCNR swap window rebuilt India's reserves by pricing dollar deposits at a fixed 3.5%
When the rupee crashed in 2013, RBI let banks swap 3-year dollar deposits at a fixed 3.5% — pulling in $34bn in weeks.
Reserve Bank of India · Indian scheduled commercial banks
The solution
Between April and August 2013 the rupee lost about 30% against the dollar as the Fed's taper talk pulled money out of emerging markets. India's reserves looked thin, and defending the currency by selling dollars directly risked burning them.
On 4 September, the RBI announced a concessional swap window: banks could swap fresh FCNR(B) dollar deposits of at least three years into rupees at a fixed 3.5% per annum rate, with the swap running for the deposit's tenor. A parallel window covered banks' overseas borrowings. Banks raised dollars abroad, swapped them at a known price, and the RBI's reserves absorbed the inflow.
The two windows mobilized USD 34 billion between September and November; by 30 November the RBI closed them, saying the funds would now flow into the market rather than to reserves. The rupee stabilized and volatility fell as the swap stock acted as a buffer.
Why it worked
- A fixed swap rate removed banks' exchange-risk hesitation about raising dollars
- The inflows went to reserves, giving the RBI ammunition without selling them down
- The three-year minimum made the money patient, not hot
- Capping and closing the window kept the subsidy temporary and cheap
What can be applied
Under a currency attack, price the shortage away: a fixed, capped swap rate turns private banks' dollar raising into central-bank reserves without the central bank spending a dollar of its own.
Aftermath
The $34bn cushion coincided with a sharp fall in rupee volatility; Governor Raghuram Rajan credited the measures with restoring stability, and the swap design was later cited as a template for crisis windows. The concessional rate cost the RBI the difference between 3.5% and market swap rates — a small bill for ending a panic.
Sources
- Swap Window for Attracting FCNR (B) Dollar Funds (circular RBI/2013-2014/234)
- Statement on Forex Market (swap windows closed; USD 34 billion mobilized)
- Bankers say extended FCNR-B facility makes little sense
spotted an error? The archive wants to know.