The Reserve Bank of India (RBI) unexpectedly announced the early closure of its special Foreign Currency Non-Resident (Bank) or FCNR(B) swap window, effective August 31, 2026. This decision comes despite the scheme garnering substantial inflows totaling $56.84 billion, with FCNR(B) deposits alone accounting for $52.3 billion by August 14.
Context Behind the FCNR(B) Scheme Launch
The FCNR(B) swap window was launched on June 8, 2026, at a critical juncture for the Indian rupee. The currency had been under immense pressure against the US dollar, exacerbated by the US-Iran conflict, which led to a sharp increase in global oil prices and, consequently, India’s import bill. Additionally, massive sell-offs by foreign institutional investors (FIIs) in Indian equity markets further weakened the rupee, pushing it to a lifetime low of 96.96 against the greenback in May.
The scheme aimed to bolster India’s foreign exchange reserves and stabilize the rupee. Under the facility, banks could raise FCNR(B) deposits from non-resident Indians (NRIs) for 3-5 year tenors. They would then sell these US dollars to the RBI in exchange for rupees, with the central bank absorbing the currency hedging costs, effectively incentivizing banks to mobilize these deposits.
Strong Inflows and Early Closure Announcement
The FCNR(B) swap window proved highly successful, attracting significantly more funds than a similar initiative in 2013, which netted around $26 billion via FCNR(B) deposits. By August 14, 2026, total inflows reached $56.84 billion, with FCNR(B) deposits making up the lion's share.
Despite this encouraging response, and a statement by RBI Governor Sanjay Malhotra on August 5, 2026, indicating no immediate plans for premature closure, the central bank announced just nine days later that the FCNR(B) swap facility would conclude a month earlier than its original September 30 deadline. The swap facility for these deposits would now be available only until September 11, 2026, instead of October 16.
Reasons Behind the Unexpected Move
The early termination of the RBI FCNR(B) swap window has prompted economists to speculate on the central bank's motivations. Rajani Sinha, chief economist at CAREEdge Ratings, suggests that the robust inflows, while positive for reserves, likely led to excessive liquidity in the system. Managing this surplus liquidity, along with the significant hedging costs borne by the RBI (estimated at 2.5-3% annually), could have influenced the decision.
While the RBI had not set a specific target for inflows, the rapid accumulation of foreign currency appears to have achieved its immediate objectives of stabilizing the rupee and boosting forex reserves sooner than anticipated. The rupee, which was around 95.74 when the window was announced, had seen some stability, although it slipped to 95.60 on August 17 following the early closure announcement.
Impact and Outlook
The premature end to the FCNR(B) scheme may limit any further appreciation of the rupee due to positive sentiment effects. Sakshi Gupta, principal economist at HDFC Bank, anticipates the rupee trading in the 95-96 range against the US dollar in the near term, potentially moving towards 96-98 by year-end, citing elevated global yields and ongoing geopolitical uncertainties in West Asia.
Economists initially expected total inflows of around $90 billion from both FCNR(B) deposits and external commercial borrowings (ECBs) and overseas foreign currency borrowings (OFCBs). With the FCNR(B) window closing early, revised estimates suggest total inflows could be around $60-70 billion. Despite the early closure, the significant inflows are still expected to contribute positively to India’s balance of payments, with Sinha projecting a surplus of $54 billion and Gupta around $50 billion for the current financial year.
Some bankers who had offered significant leverage (up to 29 times for foreign banks) against FCNR(B) deposits might now need to secure short-term funds abroad to meet their commitments to clients.