MUMBAI: The Reserve Bank of India’s (RBI) foreign currency non-resident bank (FCNR (B)) deposit window closed on Monday after attracting a much larger-than-expected pool of dollars, even as the inflows had a limited success in arresting the decline in the rupee.
Announced on 5 June and implemented from 8 June, the facility allowed banks to raise fresh three- and five-year FCNR(B) deposits from non-resident Indians and swap the dollars with the RBI at a concessional rate that effectively offset the hedging cost. The broader swap package also covered overseas foreign-currency borrowings (OFCBs) and external commercial borrowings (ECBs).
As of 21 August, total inflows under the three swap windows had reached $72.85 billion, including $65.4 billion through FCNR(B), $4.86 billion through OFCBs and $2.59 billion through ECBs. The RBI also brought forward the FCNR(B) closure date to 31 August from 30 September, citing the “encouraging response”. Swaps against eligible deposits, however, can continue with the RBI until 11 September.
The impact of the scheme on the rupee has been less straightforward. The currency was at 94.94 per US dollar on 5 June, when the RBI announced the measures, having strengthened sharply from the previous close of 95.79, Bloomberg data showed.
The rupee had already hit a record low of 96.97 against the dollar on 15 May, pressured by high crude oil prices, global bond yields and foreign investor outflows. By 31 August, the rupee was trading around 95.45 per dollar, after ending the previous week at 95.39 against the greenback. That means the Indian rupee has given back much of its initial post-announcement gains despite the unprecedented dollar mobilization.
This is because FCNR(B) inflows have not directly addressed the underlying demand for dollars in the market, said Dhiraj Nim, economist and foreign exchange strategist at ANZ.
On Monday, the rupee rose 22 paise on Monday to close at 95.22 against the dollar.
“The FCNR(B) scheme had two objectives. One was to bring in inflows, but while the inflows have, of course, risen faster and they are now bigger than most market participants had expected, they are not addressing the underlying dollar demand in the market because they have been directly swapped with the RBI,” Nim said.
The inflows have instead allowed the RBI to build reserves and given it greater flexibility to intervene. “The increase in reserves is positive, but it has not happened to the tune of inflows because the RBI has had to intervene to defend the rupee regardless,” Nim said.
As of 27 February, India’s foreign exchange reserves were at $728 billion, a day before the US-Israel-led war on Iran began. It further depleted to $681 billion as of 5 June and stood at $729 billion as of 21 August, RBI data showed.
“Yes, the scheme has achieved the objective of turning India’s balance of payments from potentially being a large negative to a considerable surplus in FY27,” Gaura Sengupta, chief economist at IDFC FIRST Bank said, adding that the additional dollars have given the RBI “much needed FX firepower to limit the depreciation pressure on the currency.”
In FY26, India’s BoP recorded a 14-year low deficit of 0.6% of GDP. With the dollar inflows, it is expected to post a surplus of over $50 billion in FY27, with current account deficit (CAD) likely contained at 1% of GDP.
That distinction is key: the scheme has materially strengthened India’s external liquidity buffer, even if it has not resulted in a sustained appreciation of the rupee.
On 11 August, former RBI governor Duvvuri Subbarao had warned that FCNR(B) deposits were not a durable answer to the rupee's structural weakness. He described the measure as “too costly” for RBI if its purpose was merely to bolster confidence in the rupee. FCNR deposits are “borrowed dollars” that have to be eventually repaid, he added.
“They do not build confidence,” Subbarao had told Bloomberg. “What we need is confidence-building flows through foreign direct and portfolio investment,” he had said.
