Explained: Why the Indian rupee is unlikely to appreciate sharply despite $49 billion foreign inflows through FCNR(B) deposits

FCNR(B) deposits continue to bolster RBI's forex armoury despite stronger rupee

The Reserve Bank of India (RBI), in its latest monetary policy on August 5, announced that there would be no move to prematurely end the special FCNR(B) deposit scheme, even though banks have already mobilised nearly $26 billion, almost double the amount raised under a similar scheme in 2013.

In June, when the Indian rupee weakened to 95-96 against the US dollar, largely due to a spike in crude oil prices amid uncertainty over the fragile ceasefire between the United States and Iran, both the RBI and the government were keen to strengthen the balance of payments, support foreign exchange reserves and stabilise the currency.

Since then, foreign currency inflows are estimated to have reached nearly $50 billion, while the rupee has appreciated to 95.2 against the dollar on August 6 from 96.8 on July 23, a gain of around 1.7%. However, these dollar inflows do not directly enter the spot foreign exchange market, limiting their immediate impact on currency dynamics.

FCNR(B) deposits – armoury to fight currency depreciation

Economists believe the broader trend for the Indian rupee remains tilted towards depreciation.

FCNR(B) deposits therefore provide the RBI with an additional buffer to counter any fresh bout of currency weakness. Ever since the ceasefire in West Asia, crude oil prices have remained volatile, falling to a low of $68.9 per barrel on July 6 before climbing to a high of $100.69 on July 23.

The pressure on the rupee stems from India's current account deficit and continued foreign capital outflows. India's current account deficit is projected at 1.8% of GDP in FY27, compared with 1.3% in FY26. There is also a strong correlation between crude oil prices and the rupee.

As crude oil prices rise, India's import bill increases, pushing up demand for dollars and putting pressure on the rupee. The Indian basket of crude currently stands at $85.71 per barrel in August, compared with $82.04 in July. Unless crude oil prices stabilise, economists believe the rupee is unlikely to witness any meaningful appreciation.

Foreign portfolio flows have also remained under pressure, with foreign institutional investors (FIIs)/foreign portfolio investors (FPIs) remaining net sellers of around ₹2.79 lakh crore in Indian equities so far in 2026.

For instance, if a bank mobilises $100 through FCNR(B) deposits, those dollars are typically swapped with the RBI in exchange for rupee liquidity. The bank's exposure continues to remain in dollars, while the RBI holds the foreign currency. As a result, these inflows do not immediately enter the spot foreign exchange market, limiting their direct impact on currency trading.

What remains unclear at this stage is the extent to which existing FCNR(B) deposits are being prematurely withdrawn and reinvested under the new scheme to benefit from the higher returns.

Vishal Goraddia, fund manager at Aikyam India Discovery Fund, said FCNR(B) deposits should be viewed as part of an investor's fixed-income allocation rather than as a growth investment.

"Compared with US Treasuries or Indian debt and hybrid funds, FCNR(B) deposits can offer competitive, tax-efficient, dollar-denominated returns for eligible NRIs, while avoiding direct exposure to Indian rupee depreciation." However, he said investors should allocate to FCNR(B) deposits from the fixed-income portion of their portfolios rather than diverting capital from equities, as doing so could mean foregoing long-term growth potential. He added that, as these deposits are time-bound, they can support foreign currency inflows during their tenure and contribute positively to overall market sentiment.

Arushi Bhagotra, consultant at the Centre for Law, Policy & Governance, NFPRC Foundation, said the renewed interest in FCNR(B) deposits should not be viewed merely through the lens of higher interest rates.

"The more consequential distinction is who bears the currency risk." While NRE deposits are rupee-denominated and expose depositors to exchange-rate movements at the time of repatriation, FCNR(B) deposits are maintained and repaid in the same foreign currency, ensuring that "the contracted return is also the realised return, provided the deposit is held to maturity."

She added that the RBI has consistently presented the June 2026 measures as "calibrated, temporary interventions" aimed at augmenting foreign currency inflows and strengthening India's external sector resilience, rather than as a permanent repricing of non-resident deposits. Outstanding FCNR(B) balances have risen by nearly 86%, from $32.56 billion on June 5 to $60.55 billion by July 30, 2026.

There has also been another setback. On July 31, Bloomberg Index Services deferred the inclusion of Indian government bonds in the Bloomberg Global Aggregate Index. Had the inclusion gone ahead, global funds tracking the index would have been required to convert foreign currencies into rupees to purchase Indian government securities. The delay means these incremental dollar inflows will now take longer to materialise, leaving the rupee more vulnerable to global macroeconomic conditions.

However, the RBI can also rely on 'moral suasion', a tool available under monetary policy, to encourage banks to channel dollars mobilised under the FCNR(B) scheme into the RBI's swap facility. This would help strengthen India's foreign exchange reserves while limiting excessive volatility in the currency. A gradual appreciation of the rupee is generally viewed as preferable from the central bank's perspective.

With global macroeconomic conditions still evolving, particularly crude oil prices and foreign capital flows, it may take some time before the rupee witnesses sustained strength. Greater clarity is expected after the FCNR(B) mobilisation window closes at the end of September, by which time banks are estimated to have mobilised $80-90 billion under the scheme.