RBI's early FCNR(B) deposit scheme closure 'data-driven' or a policy U-turn? Governor Malhotra explains
The Reserve Bank of India (RBI) announced early closure of its special FCNR(B) deposit swap window, effective August 31, a month ahead of the previously scheduled September 30 closure.
The RBI Governor described the decision as "data-driven," citing stronger-than-expected dollar inflows and prudent calibration rather than a reversal of policy intent.
Banks had mobilised over $52 billion under the scheme by mid-August, with the scheme designed to draw in the range of $75-80 billion in total inflows.
The RBI reiterated its commitment to managing exchange rate volatility and monitoring evolving market conditions in deciding the timing of such windows.
FCNR(B) Deposits — Mechanism and Purpose
Foreign Currency Non-Resident (Bank) deposits, or FCNR(B), are foreign-currency-denominated term deposits that Non-Resident Indians (NRIs) can hold with Indian banks, distinguished by the fact that the exchange rate risk is borne by the bank rather than the depositor.
Key Details
- FCNR(B) deposits can be held in major convertible currencies (USD, GBP, EUR, JPY, AUD, CAD among others) for tenures typically ranging from 1 to 5 years.
- Introduced to replace the earlier FCNR(A) scheme, under which the RBI itself bore the exchange risk — a design that proved costly to the central bank during periods of rupee depreciation, prompting the shift of exchange risk to banks under FCNR(B).
- Interest earned on FCNR(B) deposits is tax-exempt in India, and both principal and interest are fully repatriable.
- In mid-2026, the RBI introduced a special swap window allowing banks to swap fresh or renewed FCNR(B) deposit inflows (of 3-5 year tenure, with a minimum 1-year lock-in) with the RBI at a concessional/discounted rate, incentivising banks to offer NRIs higher effective returns and thereby attract larger dollar inflows.
The swap window is the specific instrument being closed early; its early closure does not affect the standing FCNR(B) deposit product, only the discounted RBI swap facility that had been temporarily incentivising banks to mobilise NRI dollar deposits in bulk.
RBI's Capital Flow Management and Forex Reserve Tools
Central banks use targeted deposit schemes and swap windows as one of several tools to manage capital account flows, defend the currency, and shore up foreign exchange reserves during periods of external sector stress or rupee volatility — a toolkit India has used before during comparable episodes.
Key Details
- A similar special NRI deposit swap scheme was used in 2013 (under then RBI Governor Raghuram Rajan) to counter a sharp rupee depreciation following the US Federal Reserve's "taper tantrum," raising over $25 billion at the time.
- Such schemes function as short-term capital account management tools distinct from monetary policy instruments (repo rate, CRR, SLR) used by the Monetary Policy Committee (MPC) to target inflation under the flexible inflation-targeting framework (RBI Act Section 45ZA, amended 2016).
- The RBI's decision-making on the timing and scale of these windows reflects its stated objective of managing exchange rate volatility rather than targeting a specific rupee level, consistent with India's managed-float exchange rate regime.
- Foreign exchange reserves accumulated via such inflows provide a buffer against external shocks and support import cover and external debt servicing capacity.
The early closure — despite inflows tracking below the top end of expectations — illustrates the RBI's stated preference for calibrated, data-driven intervention: closing the window once inflows were assessed as sufficient to meet objectives, rather than letting it run its full term and risk excess liquidity or diminishing marginal benefit.
- Special FCNR(B) swap window: originally scheduled to close September 30, 2026; closed early effective August 31, 2026.
- Inflows mobilised by mid-August: over $52 billion (against an expected range of roughly $75-80 billion).
- FCNR(B) deposits: foreign-currency-denominated, exchange risk borne by banks (unlike FCNR(A), where the RBI bore the risk).
- Deposit tenure eligible for the special swap: 3-5 years, with a minimum 1-year lock-in.
- Comparable precedent: 2013 NRI deposit swap scheme raised over $25 billion during the taper-tantrum period.
- Interest on FCNR(B) deposits is tax-free in India; principal and interest are fully repatriable.