Commerzbank says the Reserve Bank of India will shut its concessional FX swap facility for FCNR(B) deposits on 31 August, bringing forward the previous 30 September end-date after what the central bank called an “encouraging response” and ensuing inflows. By 13 August, the scheme had drawn USD52.3bn, while other inflow-support measures via overseas foreign currency borrowing (OFCB) and external commercial borrowing (ECB) are set to run until 31 December. The bank frames the decision as a recalibration after strong inflows and higher liquidity and balance-sheet costs.
The closure removes a channel that had been adding rupee liquidity and supporting government bond demand, which had helped press yields lower at the short end and the belly of the curve. In FX markets, USD/INR rose 0.2% to 95.61 after the announcement, and it has traded between 94.70 and 96.70 since early July, with RBI intervention curbing volatility and depreciation risks. Potential near-term pressure on the rupee includes higher precious metal imports, with reports that 400 tonnes of silver import licences have been approved alongside rising gold prices.
—Impact On Rupee Liquidity And Fixed-Income Markets
With the early closure of the FCNR(B) swap window on August 31, we expect a sudden reduction in rupee liquidity and a drop in government bond demand. This shift is highly likely to push short-term bond yields upward in the coming weeks. We recommend that fixed-income derivative traders position for a steeper yield curve by shorting short-term interest rate futures.
—Currency Market Dynamics And Options Strategies
In the currency markets, USD/INR is currently trading near 95.61 and has remained bound within a tight 94.70 to 96.70 corridor. Because the Reserve Bank of India is backed by massive foreign exchange reserves—which are currently estimated near a record $700 billion—we anticipate they will actively intervene to suppress any wild swings. Consequently, we suggest selling options volatility through range-bound strategies, such as iron condors, to capture premium decay.
However, we must closely monitor the growing pressure on India’s current account from rising precious metal imports. Recent approvals for 400 tonnes of silver import licenses, combined with surging gold prices, will increase the demand for dollars. We advise currency traders to maintain a slight bullish bias on USD/INR call options, targeting the upper resistance level of 96.70 as a potential breakout point.
