To check the rupee after it slid to record lows, India rolled out a temporary window in June that leaned on the diaspora through the Foreign Currency Non-Resident (Bank) plan. That alone brought in $127 billion. The RBI also attracted $9.15 billion by tapping foreign-currency borrowing overseas and external commercial borrowings, lifting total inflows to $136.38 billion and blowing past an $80 billion estimate.
To make the math work for banks, the RBI agreed to shoulder currency risk on the foreign funds they raised and offered a favorable swap facility to sweeten the deal.
That swap support is estimated to run 3% to 3.5% a year for a period of three to five years. On top of that, when banks sell dollars to the central bank, the RBI has to mop up the extra rupees created, which adds to the tab.
According to Madhavi Arora of Emkay Global Financial Services, the swap plus liquidity measures may add to 1.2 trillion rupees ($12.7 billion) over a five-year horizon. Separately, economists say the central bank could be looking at a possible $10.6 billion bill. An email seeking details on the cost did not receive an immediate reply from the RBI.
Banks extended credit lines amounting to as much as 19 times the original deposits, which amplifies liquidity management for the RBI. According to a person with knowledge of the central bank's view, officials are not overly worried about the final price tag right now because the outcome will hinge partly on the way the dollar proceeds are invested.
On the repayment side, India's foreign-exchange reserves, at roughly $730 billion and expected to rise over time, are seen as a sufficient buffer to cover what was raised.
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One knock-on effect could be pressure on the RBI's payout to the government, which matters for budget math. In May, the central bank's payout reached a record 2.87 trillion rupees, versus 2.69 trillion rupees a year earlier. As Arora put it, "The funds raised, therefore, need to be deployed judiciously and productively to mitigate these first-order and second-order fiscal costs."
There is a possible offset. If the RBI parks the dollars abroad, say in 10-year US Treasuries yielding around 4.7%, investment income could outpace hedging costs. Or as Gaura Sengupta of IDFC First Bank Ltd. said, "On a net basis, per year cost could be as low as 100 billion rupees, or even marginally positive for the RBI."
For your money, the swing factors to watch are how the RBI invests the $136.38 billion and any shifts in dividend transfers to the government, since both feed into fiscal space and, eventually, market sentiment.
