Targeted flows, not swap cost, drove early FCNR (B) closure: SBI Research

The cost of FCNR (B) swaps is unlikely to have been a constraining factor for the Reserve Bank of India's (RBI) decision to close the special swap facility ahead of schedule, according to a report. SBI Research, in its report Ecowrap, estimated that the cumulative hedging cost could amount to around USD 10.5 billion over five years. On August 14, the central bank decided to close the window for fresh FCNR(B) deposits under the special swap facility on August 31, one month ahead of the scheduled September 30 closure. SBI Research said the potential FCNR(B) mobilisation of USD 65-70 billion, combined with an average USD/INR hedging cost of around 3 per cent per annum, implies an annual notional hedging cost of about USD 2.1 billion on a USD 70 billion corpus. If this cost were to remain at 3 per cent over the five-year maturity of the deposits, the cumulative cost would amount to around 15 per cent of the corpus, or USD 10.5 billion, the report said. With current reserves at around