RBI's Forex Swap: Cheaper Funds for Banks

The Reserve Bank of India (RBI) has launched a concessional swap facility for overseas foreign currency borrowings (OFCBs) to offer banks a more affordable funding avenue. This measure comes as banks face challenges in deposit mobilization, with credit demand significantly outpacing deposit growth, a gap that widened to 550 basis points as of May 31, 2026.

The new facility, available until December 31, 2026, allows Authorised Dealer Category-I banks to access funds at a fixed rate of 1.5 per cent per annum. This represents a substantial reduction compared to market hedging costs, estimated at 3.5-4.0 per cent, effectively lowering expenses by 200-250 basis points for incremental OFCB exposures.

Funds raised through this window could be 40-50 basis points cheaper than comparable domestic deposits. This is expected to ease pressure on deposit mobilization, support monetary policy transmission, and moderate loan pricing. Banks can raise funds equivalent to 100 per cent of their Tier-I capital through this route, aiming to attract dollar inflows and stabilize the external sector amidst global uncertainties.

The RBI has also adjusted calculations for net overnight open position limits, excluding positions from these new swap facilities. This move could further reduce reliance on short-term wholesale funding instruments like certificates of deposit, thereby easing pressure on money market rates.