Bravo with FCNR(B), but now a need for structural reforms: Economists

Banks have garnered $136.4 billion of forex inflows through three different schemes as of August 31, under twin forex swap facilities announced by the Reserve Bank of India (RBI) on June 5. This is a positive, which might, years later, emerge as lessons in books, academic papers or just narratives that bankers would share with colleagues.

After all, this unprecedented fund raise was much larger-than-expected targets which bankers and experts spoke about in June of around $80- $90 billion. It even prompted the central bank to close its special forex swap facility, a month prior to the scheduled close.

These inflows include $127.2 billion through Foreign Currency Non-Resident (Bank) (FCNR(B)) account deposits, $3.89 billion through ECBs and $5.26 billion through OFCBs.

These inflows will now boost forex inflows and give the RBI enough arsenal to defend the rupee and absorb oil and other external shocks. In the past one month the rupee has traded between the 94-95 to the dollar range, even hitting the 93.55 to the dollar on August 25.

FCNR(B) deposits belong to India’s capital account because it is “on a leveraged basis, they must be paid back on maturity,” said a senior economist with a large bank, on condition of anonymity.

Not assured of rising foreign capital inflows

India has seen net FII inflows of $2.5 billion in July and $2.4 billion in August. Yet September has started with a negative figure. “The moment oil prices will move up the risk premium that foreign capital will command over emerging market economies will rise,” the first economist said.

“Are we assured of the significant amount of inflows to capital account. No, the pressure will be on,” he told Fortune India. “Now the ball is in the government’s court, rather than the RBI,” he added.

Issues like the deferment of the decision to include India’s government bonds in the Global Aggregate Bond Index is an issue which needs a close look. Experts say tax and regulatory issues need to be resolved.

“From an overseas perspective the challenge is different: in 2013, when India previously executed its FCNR(B) programme, it was more driven by the current account balance issue. But the government took policy measures to address the current account by physically reducing gold imports,” the economist said.

The coming of the Bharatiya Janata Party (BJP) to power, led by Prime Minister Narendra Modi, also completely improved market and investor sentiment in 2014, leading to more improved capital flows.

“There is no delta which people are looking at that how reform measures will push ahead. Also the interest rate differential between India and the United States is quite low – of around 150 to 175 basis points, which will restrict the way capital moves,” he added.

An economist with a rating agency said: “We had a financial current account deficit management problem in 2026 and capital account deficit in Q1FY27, we needed dollars to manage our payments. The problem of managing the CAD was leading to pressure on the rupee.”

“The FCNR flow brings stability to the currency market,” she said. “This was always a short-term fix, not a structural solution – so it means bringing in reforms to attract capital, and address taxation-related uncertainties or gaps.

“India had seen currency volatility over the past two years, which was a negative for investor confidence. An extended period of stability in the rupee could be a positive,” she said.

“From a cyclical or macro perspective FNCR(B) deposits were a positive; nominal growth with increase and the currency will stabilize. Clarity and stability around taxation, will help foreign investor sentiment improve.

Dealing with liquidity surplus

“The huge forex inflows have led to surplus net banking system liquidity of over Rs6 trillion as on August 31, 2026, the highest in last four months. Deposit growth, as per the recent fortnight print, has increased to 14.7% year-on-year, as against 12-13% earlier,” Nitin Aggarwal and Dixit Sankharva, analysts at Motilal Oswal said.

Barclays economists Aastha Gudwani and Amruta Ghare said that they now expect the Balance of Payments surplus of $100 billion for FY27. “The RBI's management of the surplus rupee liquidity from the resultant dollar swap will also matter for MPC communication. The floating liquidity surplus is much higher than the RBI's preferred level of liquidity at 1% of Net Demand and Time Liabilities (NTDL) at around Rs 2.7 trillion. We expect more liquidity absorption measures in the coming months,” they said in a report to clients.

“We expect a mix of continued variable reverse repo rate ops (VRRRs), and an incremental cash reserve ratio hike (ICRR) to be deployed; concurrently, an increase in currency in circulation in the festive period (September to November) and forex interventions will also take out liquidity,” the Barclays economists’ said.