RBI clarifies FCNR swap mechanics, limits cover to principal only as forex liquidity push gains momentum

The Reserve Bank of India (RBI) on Tuesday clarified that its recently introduced swap facility for Foreign Currency Non-Resident (Bank) deposits (FCNR-B) operates as a simple foreign exchange swap, with coverage restricted strictly to the principal component of deposits and excluding interest payouts.

The clarification came through a set of frequently asked questions (FAQs) on the swap framework covering FCNR (B) deposits, External Commercial Borrowings (ECBs) and Overseas Foreign Currency Borrowings (OFCBs), offering greater operational clarity to banks participating in the scheme.

Swap framework and risk coverage defined

The RBI reiterated that the mechanism is a plain buy-sell forex swap between the central bank and participating banks, designed to support foreign currency mobilisation while managing exchange rate risk.

“Reserve Bank of India will be providing a Forex Swap for the deposit received. The facility is a plain buy/sell foreign exchange swap from the RBI side covering only the principal amount of the deposits and not the interest component,” the central bank said.

Under the framework, banks are permitted to extend loans against FCNR (B) deposits and mark a lien on such balances, providing additional flexibility in structuring credit facilities backed by foreign currency inflows.

Policy push to attract foreign currency deposits

The clarification follows the RBI’s June 8 move to introduce a special US dollar–rupee swap window aimed at encouraging banks to mobilise fresh FCNR (B) deposits without taking hedging risk. The broader objective is to attract stable foreign currency inflows from non-resident Indians while cushioning banks from currency volatility exposure.

FCNR (B) deposits allow NRIs to hold term deposits in foreign currencies while insulating their savings from rupee depreciation risk. Under the scheme, banks can offer differential interest rates on such deposits, subject to regulatory guidelines.

The central bank also stated that swaps can be undertaken for tenors below three years, provided they are linked to fresh eligible FCNR (B) deposits with a minimum original maturity of three years.

ECB and overseas borrowing linked swaps

In addition to FCNR deposits, the RBI has extended the forex swap facility to External Commercial Borrowings (ECBs) with an average maturity of three years or more, including borrowings by public sector undertakings (PSUs).

“The tenor of the swap will be co-terminus with the repayment schedule / maturity of the ECB, subject to maximum period of five years,” the FAQs noted.

The swap mechanism has also been made available for Overseas Foreign Currency Borrowings raised by Authorised Dealer Category I banks, with a minimum maturity requirement of three years.

Context: part of broader forex stability toolkit

The introduction and clarification of the swap framework come amid the RBI’s broader efforts to stabilise foreign exchange flows, strengthen external buffers, and diversify sources of foreign currency liquidity. By clearly defining risk-sharing boundaries—especially limiting coverage to principal amounts—the central bank aims to balance capital inflow incentives with prudential safeguards for the banking system.