Industry Odisha Bureau, Oct 27: Several large Indian banks have stepped back from a lucrative forex swap trade. The retreat follows concerns that the Reserve Bank of India may frown on such deals. Some lenders reportedly unwound positions, while others shelved planned transactions. The shift matters for currency markets, bank treasuries and the RBI’s liquidity strategy.
The development was first reported by The Economic Times on October 27. Three people told the newspaper that some banks received informal signals from the RBI. The central bank has not confirmed any such message. No circular or formal restriction on these trades has been issued. The RBI did not respond to the newspaper’s queries before publication.
The trade grew out of a special dollar-raising scheme launched this year. Under it, banks mobilised foreign currency deposits from non-resident Indians. The RBI opened the concessional swap window on June 8, 2026. Banks then swapped these FCNR(B) dollars with the RBI for rupees. Crucially, the central bank absorbed the full cost of hedging the principal.
The Economic Times put total FCNR(B) mobilisation at $132 billion. Official data shows a slightly different picture. RBI figures show $127.2 billion in FCNR(B) deposits by August 31. Total inflows under the wider swap facility crossed $143.5 billion by September 18. That wider number also includes external commercial borrowings and overseas loans. Either way, the scheme left banks flush with rupee funds.
Some banks then found a profitable use for this surplus. They used rupees to buy dollars in the spot market. At the same time, they sold dollars forward for a future date. This combination is known as a buy-sell swap. The dollars raised were parked in short-term US Treasury bills.
The appeal lay in a double return. First, banks earned interest on the US government securities. Second, they pocketed the forward premium on dollars sold forward. This premium is the gap by which the forward rupee-dollar rate exceeds spot. A bank selling dollars forward collects that gap as income.
The numbers looked attractive. One-year forward premiums were above 4.5%, according to a banker quoted by ET. He said premiums eased on Monday. US Treasury bill yields hovered near 4.4%, having climbed over three months. Together, the indicative gross return came close to 9%.
That figure overstates the actual profit. Banks must account for the cost of the rupee funds deployed. Capital charges, transaction costs and balance sheet limits also eat into returns. The net spread is smaller, and its exact size is unclear.
Why might the RBI be uneasy? Bankers suggest the answer lies in who bears the risk. The RBI is shouldering the currency risk on FCNR(B) principal. It would therefore likely prefer banks to lend those rupees at home. Sending the money abroad for yield arbitrage may sit poorly with that aim. This reasoning reflects banker views, not any stated RBI policy.
The regulator may not oppose such swaps altogether. A senior private bank official told ET the trades carry benefits. More forward dollar selling softens premiums. That lowers hedging costs for importers. He said the RBI may accept dollars lent to corporates as trade finance. Very short-term overseas placements might also be tolerated, in his view.
History offers a useful parallel. During the 2008 global financial crisis, the RBI spotted similar trades. Some foreign banks used Indian rupee resources to run buy-sell swaps. They then sent the dollars to cash-starved parent entities overseas. Global money markets had frozen at the time. The RBI responded by capping how much local funds could flow to head offices. The limits applied to foreign bank branches’ capital and deposit base.
Today’s situation differs sharply. Global funding markets are not frozen. The banks involved are not rescuing troubled parents abroad. The present trades were driven by yield, not survival.
There is also an irony in the story. The RBI’s own operations helped create the opportunity. To drain surplus rupee liquidity, the central bank ran sell-buy swaps. It sold dollars spot, absorbing rupees, and bought dollars forward. Its forward dollar purchases propped up the forward premium. A second banker said some lenders saw this as a chance to profit. In effect, banks took the other side of the RBI’s trade.
The banks’ retreat could have several consequences. Fewer forward dollar sales may keep premiums elevated for longer. That would keep hedging costly for importers and borrowers with dollar loans. Treasury desks lose a high-yield avenue for surplus funds. More rupee liquidity could instead flow into domestic credit or overnight markets. Banks might also redirect swap dollars into trade finance for corporates.
What happens next depends on the RBI’s stance. A formal clarification would give banks much-needed certainty. Until then, lenders appear to be reading informal cues cautiously. The episode shows how closely Indian banks track the regulator’s preferences. It also shows how central bank operations can create unintended market openings.
