RBI Governor Says Early FCNR(B) Closure Was calibration, Not U-turn: Financial Express

Reserve Bank of India Governor Sanjay Malhotra defended the decision to advance the closure of the FCNR(B) swap window by a month, saying the move was a well-thought-out, calibrated, prudent and data-driven response to rapidly evolving conditions.

“It will not be correct to call it a U-turn; it is rather a calibration,” Malhotra said in an interview with Financial Express.

Malhotra said the decision reflected the RBI’s ability to remain flexible and data-dependent as conditions changed. He also pushed back against criticism that his August 5 comments had ruled out an early closure of the window.

“I would like to highlight the use of the words ‘as of now’ when I mentioned that there was no proposal to advance the last date,” he said. The RBI had also indicated that it would keep stakeholders informed of any decision, which meant an early closure had not been ruled out, he added.

According to Malhotra, the decision was taken from a position of strength, with inflows under the three swap-linked schemes stronger than the RBI and most market participants had expected.

The RBI expects the FCNR(B), external commercial borrowings and overseas foreign currency borrowings schemes to attract at least $80 billion, Malhotra said. The inflows would reflect India’s strong macroeconomic fundamentals and further strengthen the country’s balance of payments, he added.

“There is a diminishing marginal utility of every dollar that is swapped. At the same time, there is an increasing marginal cost because you need to sterilise it for a longer period,” Malhotra said.

The RBI announced on August 14 that the FCNR(B) mobilisation window would close on August 31, instead of September 30, while banks can avail the associated swaps until September 11.

Foreign currency inflows under the three facilities had reached $56.85 billion as of August 13, including $52.30 billion through FCNR(B) deposits.

While the announcement may have appeared sudden, Malhotra said stakeholders had been given more than two weeks to make necessary arrangements and benefit from the scheme during the remaining period, which the RBI considered sufficient.

He said the underlying objective of the facility—to attract foreign currency assets and strengthen the external sector—remained unchanged. The early closure of the temporary facility was part of the RBI’s broader external-sector management.

On the cost and contingent liability for the RBI, Malhotra said the foreign currency assets received through the swaps would appear as foreign currency assets on the central bank’s balance sheet, increasing its size. The outstanding forward leg would be shown as a contingent liability and remain an off-balance-sheet item.

On the rupee and the RBI’s record net short forward-dollar position, Malhotra said the position remained “very manageable”. He said it primarily reflected swaps previously undertaken to infuse liquidity and the latest facilities intended to strengthen the balance-of-payments position.

“The exchange rate continues to be market determined,” Malhotra said, adding that the RBI’s intervention policy remained focused on curbing excessive volatility and undue speculative activity.

The RBI remains committed to ensuring orderly financial conditions and orderly movements in the exchange rate, he added.