The Reserve Bank of India (RBI) has introduced a discounted foreign exchange (FX) swap facility at a rate of 1.5%, a move aimed at attracting overseas capital inflows and strengthening the country’s external financial position.
Under the new framework, the RBI will absorb the foreign exchange risk for participating investors, making it cheaper and more attractive for global funds to bring money into India. The initiative is designed to encourage inflows into government securities and other financial assets at a time when global markets remain volatile and capital flows are increasingly sensitive to interest rate expectations.
Market participants estimate the measure could potentially attract up to $50 billion in additional foreign inflows over time. By reducing hedging costs, the RBI is effectively lowering one of the key barriers faced by overseas investors when investing in Indian assets.
Foreign investors typically hedge currency exposure to protect themselves from exchange-rate fluctuations. However, hedging costs can significantly reduce investment returns. The RBI’s discounted swap arrangement addresses this concern by providing a lower-cost mechanism for managing currency risk.
The announcement comes amid a relatively favourable macroeconomic environment marked by moderating inflation, resilient economic growth and expectations of continued policy support from the central bank. Lower crude oil prices have also improved India’s external outlook by easing pressure on the country’s import bill.
Financial markets responded positively to the development. Bond yields eased as investors anticipated stronger foreign participation in debt markets, while sentiment towards the rupee improved on expectations of increased dollar inflows.
Analysts said the move reflects the central bank’s efforts to strengthen India’s foreign exchange reserves, support the rupee and improve liquidity in domestic financial markets. The measure also complements recent policy steps aimed at enhancing India’s attractiveness as an investment destination.
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