Why in News?

  • The Reserve Bank of India (RBI) has decided to prematurely close its special forex swap facility for fresh Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits.
  • The fresh deposit mobilisation window will close on 31 August 2026, earlier than originally planned, following an encouraging response.
  • The facility has attracted $52.3 billion through FCNR(B) deposits.
  • However, banks can continue to undertake swaps against FCNR(B) deposits already mobilised under the facility until 11 September 2026.
  • The facilities for External Commercial Borrowings (ECBs) and Overseas Foreign Currency Borrowings (OFCBs) will remain open until 31 December 2026.

WHAT IS SPECIAL FOREX SWAP FACILITY?

  • The RBI introduced the special US dollar-rupee forex swap facility on 8 June 2026.
  • Under the facility, banks were allowed to mobilise fresh three-to-five-year FCNR(B) deposits from overseas depositors.
  • Banks could then swap the foreign currency raised through these deposits with the RBI at a concessional rate.
  • The RBI's arrangement effectively covered the hedging cost for banks.
  • This made FCNR(B) deposits a more attractive source of foreign currency funding for Indian banks.

HOW MUCH FOREIGN CURRENCY HAS THE FACILITY ATTRACTED?

  • According to data reported by authorised dealer banks, the three components of the special forex facility attracted total foreign currency inflows of $56.846 billion up to 13 August 2026.
  • FCNR(B) deposits accounted for the overwhelming majority of the inflows.
  • The mobilisation was significantly higher than the initial weeks of the scheme.
  • Bankers had earlier expected inflows to accelerate during August and September.
Component Inflows
FCNR(B) deposits $52.3 billion
OFCBs $2.805 billion
ECBs $1.741 billion
Total $56.846 billion

WHAT ARE FCNR (B) DEPOSITS?

  • FCNR(B) stands for Foreign Currency Non-Resident (Bank)
  • They are deposits that can be opened by:
    • Non-Resident Indians (NRIs)
    • Persons of Indian Origin (PIOs)
  • These deposits are maintained in foreign currency rather than Indian rupees.
  • They are fully repatriable.
  • FCNR(B) deposits are also exempt from tax in India.
WHY DID THE RBI INTRODUCE THE FACILITY? The facility was part of a broader package announced in June to:
  • Encourage foreign capital inflows.
  • Strengthen the Indian rupee.
  • Support foreign exchange reserves.
  • Improve foreign currency liquidity in the banking system.
  • Make overseas funding more attractive for Indian banks and companies.
The RBI also:
  • Eased norms for state-owned enterprises to borrow overseas.
  • Provided a concessional swap facility to encourage ECBs by public sector companies.

WHY WAS THE FACILITY ATTRACTIVE TO BANKS?

  • One major challenge in attracting foreign currency deposits is the cost of hedging foreign exchange risk.
  • Banks normally have to bear this cost when converting or managing foreign currency liabilities.
  • Under the RBI's special arrangement, the central bank absorbed the hedging cost through concessional swaps.
  • This reduced the cost of raising foreign currency funds.
  • Banks could therefore offer more attractive interest rates to overseas depositors.
HIGHER INTEREST RATES FOR NRIs
  • The RBI temporarily withdrew the interest-rate ceiling on fresh FCNR(B) deposits with three-to-five-year tenors until 30 September 2026.
  • Banks subsequently started offering higher rates to attract overseas funds.
  • Several banks were offering rates of around 7% on FCNR(B) deposits.

WHY DID THE RBI CLOSE THE FCNR (B) WINDOW EARLY?

  • The main reason was the very strong response to the facility.
  • FCNR(B) deposits alone brought in $52.3 billion.
  • The scale of inflows was much higher than initially expected.
  • Therefore, the RBI decided that there was no need to keep the fresh-deposit mobilisation window open until the original deadline.

IMPORTANT DISTINCTION

  • Fresh FCNR(B) mobilisation: Closes on 31 August 2026.
  • Swaps against FCNR(B) deposits already mobilised: Available until 11 September 2026.
  • ECB and OFCB facilities: Remain open until 31 December 2026.

WHAT IS THE RBI FOREX SWAP MECHANISM?

  • Under the FCNR(B) facility, the RBI provides a plain buy/sell foreign exchange swap.
  • The swap covers the principal amount of eligible FCNR(B) deposits.
  • It does not cover the interest component.
  • Banks can undertake swaps for less than three years if they have mobilised eligible FCNR(B) deposits having an original maturity of at least three years.

WHAT ABOUT ECBs?

  • For External Commercial Borrowings (ECBs), the facility applies to borrowings with an average maturity of three years or more.
  • The swap tenor is linked to the repayment schedule or maturity of the ECB.
  • The maximum swap period is five years.

WHAT IS THE SIGNIFICANCE FOR THE INDIAN ECONOMY?

1. Supports Foreign Exchange Liquidity
  • Large foreign currency inflows improve the availability of foreign exchange in the banking system.
  • This can help strengthen overall financial and external-sector stability.
2. Supports the Rupee
  • The facility was introduced partly to support the rupee amid currency pressures.
  • However, the large inflows do not necessarily mean a sharp appreciation of the rupee.
3. Helps Indian Banks
  • Banks receive access to a larger pool of foreign currency funding.
  • Lower hedging costs make FCNR(B) deposits more attractive.
4. Supports Capital Inflows
  • The scheme encourages overseas investors and NRIs to place funds with Indian banks.
  • This helps strengthen India's external financing position.
5. Strengthens Liquidity and Stability
  • According to the CareEdge assessment cited in the source, the scheme should primarily be viewed as a liquidity and stability measure, rather than as a major driver of sharp currency appreciation or reserve accumulation.

WHY MAY FOREX RESERVES NOT RISE SHARPLY?

  • Despite large inflows, the rupee has not appreciated significantly because of:
    • Global uncertainties
    • Geopolitical risks
    • Weaker capital-flow dynamics
  • The RBI also has substantial forward forex obligations, which may limit any visible increase in reserves.

BACKGROUND: THE 2013 PRECEDENT

  • The special swap facility revived a tool that the RBI had previously used in 2013.
  • In 2013, the RBI introduced similar measures to attract foreign currency inflows when the rupee was under pressure.
  • The 2026 facility was introduced against a similar need to attract foreign capital and support currency and financial stability.

LEVERAGED FCNR (B) DEPOSITS

  • Banks are also offering leveraged FCNR deposit structures to overseas investors.
  • In this strategy:
    • The investor puts in part of the money from their own funds.
    • Additional foreign currency is borrowed against the deposit through a bank or affiliated overseas lender.
    • The borrowed funds are also invested in FCNR deposits.
  • This creates a larger deposit base.

INTEREST RATE ARBITRAGE

  • The strategy is based on interest-rate arbitrage.
  • If the return on the FCNR deposit is higher than the cost of borrowing, the difference can generate additional returns for the investor.
  • However, leveraged structures also involve additional financial and market risks.

OVERALL SIGNIFICANCE

  • The RBI's decision to close the FCNR(B) mobilisation window early reflects the strong response to the special forex facility.
  • The $52.3 billion FCNR(B) inflow shows that the concessional swap arrangement and higher deposit rates significantly increased the attractiveness of foreign currency deposits.
  • The measure primarily aims at improving foreign exchange liquidity, supporting financial stability and encouraging foreign capital inflows.
  • At the same time, the continued opening of ECB and OFCB facilities until 31 December 2026 shows that the RBI continues to support other channels of foreign currency funding.