Business · Markets · 7 hrs ago
Indian banks pull back from dollar swaps amid RBI concerns
Some large Indian banks have pulled back from currency swaps after sensing the Reserve Bank of India may disapprove.
The deals used rupee liquidity created after banks received funds linked to $132 billion in overseas Indian deposits.
Banks bought dollars in the spot market, sold them forward and invested the dollars in US Treasury bills.
The combination of Treasury yields and forward premiums offered a gross return of close to 9% at the time described.
The RBI may prefer banks to use the rupees for lending, although its view on the transactions has not been officially confirmed.
The regulator’s position remains unclear, and banks may still use the swaps to support trade finance or make short-term overseas investments.
Some large Indian banks have shelved or reconsidered foreign-exchange swap deals after sensing that the Reserve Bank of India may not support them.
The banks used rupee liquidity from diaspora deposits to buy dollars and invest the funds in US Treasury bills.
The strategy combined US Treasury bill yields with forward-market premiums, producing a reported gross return close to 9%.
The RBI’s position was not officially confirmed, and a bank official said the regulator might accept swaps used for lending or short-term placements abroad.
- Who
- Some large Indian banks and the Reserve Bank of India.
- What
- Banks pulled back from or reconsidered buy-sell foreign-exchange swaps used to invest dollars in US Treasury bills.
- When
- The article was published on October 26, 2026; it says banks had backed off by then.
- Where
- India’s foreign-exchange market, with swap-generated dollars invested in US Treasury bills.
- Why
- Banks sensed the RBI might not support using rupee liquidity from FCNR deposits for overseas investments rather than lending.
Banks using swaps
Reserve Bank of India
Use of rupee liquidity
Banks using swaps
Banks used rupees received after swapping FCNR dollars to buy dollars and invest in US Treasury bills for higher returns.
Reserve Bank of India
The RBI may prefer banks to use the rupees for lending, given that it bears the currency risk on the FCNR principal.
Acceptable swap proceeds
Banks using swaps
A bank official said the regulator might allow swaps if the dollars were lent as trade finance or placed abroad briefly.
Reserve Bank of India
The RBI’s view was not officially confirmed; the article reports that banks sensed it might not encourage the transactions.
US Treasury bill yields rose, according to the article.
Banks received rupee liquidity by swapping FCNR dollars with the RBI.
Some large banks backed off from swap deals they had entered into or were considering.
The one-year forward premium came down, the article reported.
- FCNR mobilisation
- $132 billion
- Reported forward premium
- More than 4.5% at the time described, before coming down on Monday
- US Treasury bill yields
- Around 4.4%
- Reported gross return
- Close to 9%
What people are saying
With the one-year forward premium then at over 4.5% - though it came down on Monday - and US Treasury bill yields hovering around 4.4%, the gross return was close to 9%.
In fact, buy-sell swaps would soften forward premiums (as more banks sell forward) and lower hedging costs for importers.