India's central bank rolled out new measures Tuesday evening to boost dollar inflows through its swap facility for non-resident Indian deposits. The Reserve Bank of India clarified that banks can now lend against FCNR(B) deposits and issue standby letters of credit, effectively letting depositors borrow more to raise additional funds abroad. This circular mechanism aims to attract more dollars to the Indian financial system amid global market volatility.

Three key changes provide banks with greater flexibility. First, lenders can access the swap facility even when deposits have less than three years remaining, as long as they were originally raised with a minimum three-year tenor. Second, the facility covers only deposit principal, not interest payments. Third, banks can extend credit to non-residents backed by these foreign-currency deposits. These adjustments make longer-term deposits more attractive by removing immediate hedging pressure.

However, the swap facility's principal-only coverage leaves banks exposed to interest rate risk. If the rupee weakens significantly before deposit maturity, lenders may need to purchase dollars at higher market rates to meet interest obligations, potentially squeezing profit margins. This creates a trade-off between attracting foreign capital and managing currency risk for Indian banks.

The policy emerges as foreign outflows have pushed the RBI's share of government bond holdings to 17.6% at March-end, the highest level since 2013. While markets sold off across Asia, India's decline was less severe than markets like South Korea, suggesting the new measures could position the country as an alternative destination for global capital seeking diversification away from technology stocks.