The Reserve Bank of India (RBI) successfully attracted a massive $127 billion through its special Foreign Currency Non-Resident (Bank) or FCNR(B) swap window. While these inflows significantly bolstered India's foreign exchange reserves to a record $785.7 billion by early September 2026 and helped stabilize the rupee, they have presented the central bank with two critical problems: managing an immediate surge in domestic liquidity and preparing for substantial redemption pressures in the coming years.
Context: A Strategic Move to Stabilize the Rupee
The RBI opened the special swap window in June 2026 amid considerable pressure on the Indian rupee. Factors contributing to this pressure included the resumption of the West Asia war, surging crude oil prices, a rising import bill, and heavy selling by foreign portfolio investors (FPIs). The rupee had slumped to a record low of 96.96 against the US dollar by May 20. The FCNR(B) scheme allowed banks to raise foreign currency deposits, offering attractive interest rates of 6-7% (compared to a typical 3-4%), with the RBI bearing the hedging cost for the principal amount.
The initiative proved so successful that the RBI closed the window a month earlier than planned, on August 31, 2026. This influx, alongside $5.26 billion from Overseas Foreign Currency Borrowings (OFCBs) and $3.89 billion from External Commercial Borrowings (ECBs), played a crucial role in shoring up India's forex war chest and helped the rupee recover to above 94.5 against the dollar by early September, though it has recently seen renewed depreciation.
Immediate Liquidity Surge
Under the swap arrangement, banks exchange the foreign currency deposits raised for rupees from the RBI, injecting significant liquidity into the domestic banking system. This led to a surplus liquidity of over ₹11 lakh crore in the first week of September. While some experts believe this could ease pressure on banks to compete for domestic deposits and potentially support credit growth, the RBI views it as a challenge for monetary policy transmission.
With retail inflation at 4.82% and wholesale price index (WPI) inflation at 9.92% in August, the RBI is wary of excess liquidity fueling a fresh credit and demand cycle that could exacerbate inflationary pressures. To absorb this surplus, the central bank has stepped up efforts, including announcing sovereign bond sales of ₹1 lakh crore and absorbing another ₹2.4 lakh crore through variable rate reverse repo (VRRR) auctions in September. Economists like Dhananjay Sinha of Systematix Group suggest the RBI's current interest rate stance might be out of step with inflation, advocating for a shift towards a higher repo rate.
Future Redemption Challenges
The FCNR(B) deposits will mature in three to five years, with nearly half having a five-year tenor and 42% maturing between three and four years. This timeline sets the stage for a potentially massive outflow of dollars as depositors redeem their funds, creating future pressure on the rupee, especially if global and domestic economic conditions are unfavorable. Murthy Nagarajan, Head – Fixed Income at Tata Asset Management, highlights the need for the RBI to perform a “fine balancing act” to maintain economic stability and attract capital flows.
While the RBI covers the hedging cost for the principal, banks bear the cost for the interest component, slightly increasing the effective cost of these deposits. Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India, suggests that profits from deploying the $100 billion in globally investable avenues could offset the hedging costs. However, Prasanna Tantri of the Indian School of Business questions the necessity of such an emergency measure this time, given the lack of a severe forex crisis comparable to 2013.
Divided Expert Opinions
Experts remain divided on the prudence of the FCNR(B) move. Abheek Barua, a visiting professor at Ashoka University, argues that the move was crucial for short-term stability, preventing the rupee from potentially hitting 100 against the dollar. Conversely, Tantri suggests there was no immediate calamity warranting such an emergency measure this time, proposing that raising interest rates might have been a more conventional approach. Radhika Rao of DBS Bank, however, notes that the record foreign reserves provide policymakers with a substantial buffer against future volatility.
As the RBI navigates these immediate liquidity challenges and prepares for future redemption flows, its policy decisions will be critical in balancing external stability, managing inflation, and supporting economic growth.