Criticism Of RBI's Swap Scheme Is Uncalled For

It is important to understand that the rupee's appreciation, driven by the 2013 special swap scheme, reduced India's import costs for petroleum, oil, and gold, points out Dr Ashwani Mahajan, National Co-Convenor, Swadeshi Jagaran Manch.

On June 8, the Reserve Bank of India launched a special swap scheme, enabling banks to swap foreign currency deposits made by the Indian Diaspora (people of Indian origin living abroad) with the Reserve Bank at the present rate.

Essentially, the RBI would return dollars, deposited with them from these FCNR deposits at the same rate at which banks deposited dollars with the Reserve Bank today.

That is, banks were freed from hedging against currency risk, as RBI has ensured them against any currency risk.

Encouraged by this scheme, banks accepted deposits from the Indian Diaspora at interest rates of 6 to 7 percent -- rates significantly higher than the 3 to 4 percent offered previously.

Previously, banks had to incur hedging costs to mitigate the risk of the rupee depreciating against the dollar; while hedging costs fluctuate over time, they currently hover around 3 percent.

Driven by these incentives and a deep-rooted trust in the Indian economy, the government, and the banking system, the Indian Diaspora created history by depositing $127.2 billion in less than three months in FCNR-B deposits.

It is worth noting that a similar scheme in 2013 had garnered only $34.3 billion, with $26 billion coming in the form of FCNR (Foreign Currency Non-Resident) deposits.

While the 2013 scheme remained open for 85 days -- matching the duration of the recent scheme -- the total deposits in FCNR accounts reached $127.2 billion during this period, with total inflows amounting to $136.4 billion.

This represents a nearly 4.9-fold more FCNR-B deposits, compared to the 2013 figures.

Although the Reserve Bank's scheme has been highly successful and its results are already becoming evident, it is facing criticism from some quarters.

Critics argue that by exempting banks from hedging costs and assuming that burden itself, the Reserve Bank of India has exposed itself to future consequences; when these deposits would mature and the dollar appreciates against the rupee, the resulting losses will erode the Reserve Bank's profits, then.

Consequently, a decline in the Reserve Bank's profits would reduce the Government of India's receipts, leading to a budgetary imbalance.

Why These Arguments Are Flawed

Debating policies is a healthy tradition in a democracy; however, scrutinizing the validity of critics' arguments is equally essential to ensure policies are steered in the right direction.

It is also important to discuss the benefits of the Reserve Bank's special swap scheme, which resulted in an inflow of $127 billion into the country's foreign exchange reserves.

Furthermore, one must weigh the potential future losses the Reserve Bank is concerned about against the overall benefits the country stands to gain from this scheme.

A Similar Scheme Succeeded in the Past

Back in 2013, when the country was grappling with a foreign exchange reserve crisis, the Reserve Bank of India raised $34.3 billion in just 85 days through a similar special swap scheme; of this amount, $26 billion came via FCNR (Foreign Currency Non-Resident) deposits.

At that time, the foreign exchange market was rife with extreme uncertainty.

Prior to this scheme, banks typically had to bear the complete currency risk themselves, which limited the interest rates they could offer on FCNR-B deposits.

Under the 2013 scheme, the Reserve Bank guaranteed banks that whenever these deposits matured -- between three and five years later -- it would charge them a fixed rate of only 3.5 percent per annum.

Encouraged by this, banks sought to boost FCNR deposits by offering higher interest rates.

In its 2013-2014 annual report, the Reserve Bank of India acknowledged that the increase in foreign exchange reserves resulting from this special swap scheme brought stability to the rupee.

It is worth noting that prior to September 2013 (when the scheme was launched), the rupee was undergoing rapid depreciation; between April and August 2013 alone, it had depreciated by 16.2 percent.

However, as a result of this scheme -- and despite adverse external conditions -- the rupee strengthened by 9.7 percent between September 2013 and March 31, 2014, while foreign exchange reserves rose from $275.5 billion in August to $292.1 billion by January 2014.

It is important to understand that the rupee's appreciation, driven by the 2013 special swap scheme, reduced India's import costs for petroleum, oil, and gold.

It facilitated the servicing of government and foreign debt and helped curb imported inflation.

Capital from abroad became cheaper, and pressure on the current account eased.

Consequently, the arguments of those who criticized the low swap costs guaranteed by the Reserve Bank proved unfounded.

Furthermore, when the Reserve Bank's expenditure on this swap scheme is weighed against the relief it provided from the foreign exchange crisis and the substantial benefits it yielded for the nation, the scheme is clearly seen as advantageous.

Most importantly, the scheme played a pivotal role in shielding the Indian economy--which was then considered one of the world's five most vulnerable economies -- from the foreign exchange crisis.

The Current Special Swap Scheme and Its Benefits

First and foremost, this scheme is driving the rupee towards strength.

The current swap scheme was introduced at a time when Foreign Institutional Investors (FIIs) were consistently selling and pressuring the government for tax concessions -- concessions the government was eventually compelled to grant.

Furthermore, our foreign trade balance was deteriorating due to war, disruptions in global supply chains, rising oil prices, and other global factors; consequently, the Indian rupee was steadily weakening, sliding from ₹89.50 per dollar on January 1, 2026, to ₹96.96 per dollar by March 20, 2026.

To stabilise the rupee amidst this situation, the Reserve Bank had to sell massive amounts of dollars, raising the specter of a foreign exchange reserve crisis in India.

Under these circumstances, the Reserve Bank implemented the special swap scheme, resulting in a massive influx of dollars -- including $127.2 billion from FCNR bank deposits alone.

This significant inflow caused the rupee to strengthen right from the scheme's inception; by September 5, 2026, the exchange rate had improved to ₹94.49 per dollar.

There is no doubt regarding the inherent benefits of a stronger rupee.

Second, historically, FCNR deposits have exhibited very low volatility compared to FPI investments.

It is puzzling that while critics have no issue with FPIs given benefits such as tax exemptions on interest and capital gains, they are so concerned about the concessions granted to FCNR-B deposits.

Third, Critics assume that since banks do not have to bear hedging costs under the RBI's special swap arrangement, the RBI must be bearing them -- which is not actually the case.

In reality, these deposits will help boost foreign exchange reserves held by the RBI; if deposited with the US Federal Reserve, these reserves would earn 5%-6% interest while at the same time it would act as a buffer against unforeseen situations.

Furthermore, the special swap scheme applies only to the principal deposit, and not the interest.

Fourthly, commercial banks had been currently under immense pressure due to slowing deposit growth and persistently high credit growth.

Consequently, they were forced to raise funds at higher interest rates, making borrowing expensive and adversely affecting economic growth.

Thanks to the special swap scheme and the resulting influx of FCNR-B deposits, banks will have access to over ₹12 lakh crore in additional funds, partially resolving the issue of fund shortages for lending.

Fifthly, the additional foreign currency resources secured in this manner have strengthened India's external liquidity position, serving as a vital insurance against sudden spikes in oil prices, capital outflows, and abrupt pressure on the rupee -- a form of insurance the country could not purchase at any price.

Dr Ashwani Mahajan is National Co-Convenor, Swadeshi Jagaran Manch and former Professor, PGDAV College, University of Delhi.

Feature Presentation: Aslam Hunani/Rediff