The Reserve Bank of India (RBI) recently advanced the closure of its Foreign Currency Non-Resident (Bank), or FCNR(B), deposit mobilization scheme, a move that has drawn scrutiny regarding the central bank's communication strategy.
Just weeks prior, RBI Governor Sanjay Malhotra had stated at a Monetary Policy Committee (MPC) meeting that there was “no proposal under consideration to close the scheme prematurely.” However, the RBI announced on August 14 that the facility would close a month earlier than initially planned.
Governor Malhotra Rejects “U-Turn” Label
Governor Malhotra has rejected descriptions of the decision as a “U-turn,” emphasizing that the central bank’s actions were a data-driven and calibrated response to rapidly evolving market conditions. He highlighted the phrase “as of now” in his earlier statement, indicating that the RBI was continuously assessing a dynamic situation.
The FCNR(B) scheme had already attracted a substantial $57 billion in foreign currency inflows. Estimates from SBI Research suggested that an additional $25-30 billion could flow in during the remaining days of August, potentially pushing total collections to approximately $85 billion. This stronger-than-expected influx of dollars was a primary driver behind the early closure.
Rationale Behind the Early Closure
Malhotra explained that the decision was made from a position of strength, noting that the three measures implemented to support the rupee—including FCNR(B) deposits, overseas foreign currency borrowings, and external commercial borrowings—were anticipated to attract at least $80 billion into India.
Furthermore, the Governor elaborated on the diminishing marginal utility of continuing the swaps. As inflows strengthened, the marginal benefit of each additional swapped dollar decreased, while the marginal cost of sterilizing those funds for a longer period increased. The RBI concluded that maintaining the facility was becoming less effective.
The initial objective of the FCNR(B) facility was to attract foreign-currency assets and bolster India’s external sector during a period of global uncertainty and capital outflows. Malhotra asserted that the early closure was consistent with this broader objective of external-sector management, rather than a reversal of policy.
The RBI also ensured that stakeholders had more than two weeks to finalize arrangements and benefit from the facility before its premature conclusion, which Malhotra deemed sufficient. This episode underscores the RBI’s delicate balance between maintaining policy predictability and retaining the flexibility to respond to new economic data.