The RBI possibly had no option but to close the FCNR(B) deposit mobilisation early

In the past few days, the focus and debate of the RBI’s current market actions has shifted from inflation and growth to the raising of Foreign Currency Non-Resident (Bank) deposits, one of India’s largest and most aggressive interventions to assist the ailing balance of payments and boost sentiment for the rupee.

In a surprise decision the RBI advanced the closing of the concessional swap facility available linked to the Foreign Currency Non-Resident (Bank) deposits, by a month. On August 14, while announcing the collection of FCNR(B) deposits to $52.3 billion through this route, the RBI announced closing of the mobilisation for fresh FCNR(B) deposits, prematurely to August 31, following an “encouraging response.” The zero-cost swap facility deadline was advanced to September 11, 2026 from October 16.

The scheme for ECBs and OFCBs will continue to be open till December 31, 2026, as mentioned earlier.

But this move spooked bankers and the market participants because just eight days prior to the August 14 announcement – on August 6 after the monetary policy meeting -- Governor Sanjay Malhotra told the media that “as of now, there was no proposal under consideration to end the scheme ahead of schedule.” It brought with it a sense of lack of policy clarity.

And now a few days later, Malhotra, on August 20, in an interview to the Financial Express newspaper, came forward to clarify this change of stance. “It will not be correct to call it a U-turn; it is rather a calibration,” Malhotra said. The move demonstrated the central bank’s ability to remain flexible and data-dependent amid rapidly changing conditions, he added.

If kept open, a costly proposition

When the new FCNR(B) deposit scheme was announced on June 5, crude oil prices were at $95 to a barrel and the rupee was at near 95.3 to the dollar. When the RBI had announced the premature closure of the swap facility, oil had fallen to $88.2 per barrel and the rupee steady at 95.6 to the dollar.

The details of how the FCNR(B) deposits scheme works is as follows. Non-residents Indians (NRIs) can deposit fresh money or renew existing ones. On maturity of the scheme applied for, the principal and interest on FCNR (B) deposits are fully repatriable, without restrictions.

Banks collect money from depositors in foreign currencies, into fixed accounts of 3 to 5 years’ maturity. They continue to hold the funds in the permitted foreign currency. Under the special hedging facility, the RBI absorbs this cost – estimated at 2-3% -- which means banks can offer higher returns to depositors, between 5.5 to 7.1%. This is similar to what banks offer in the domestic markets too.

Banks sell the dollars to the RBI under the swap, and the RBI provides the bank with the equivalent rupees. The RBI gets the dollars, but they do not enter the open market, but becomes ammunition for the central bank to intervene if the rupee comes under pressure.

Since June 8, when the scheme was operationalised, the rupee had hit a low of 96.88 to the dollar on July 23, to strengthen to 95.7 level on August 21.

On maturity of the scheme, the bank returns the rupees to the RBI and receives the dollars back. The swap thus helps the bank to meet its rupee funding needs.

An economist at a research institution provides us with the maths, showing just why Malhotra might have decided on an early closure to the scheme. “If banks manage to raise $65 billion, through the FCNR(B) deposit scheme, assuming a five-year compounded interest rate of 6.5%, the repayment which banks will have to make back to depositors is estimated at $88 billion,” the economist said, declining to be named.

“If the RBI had kept the scheme open longer, India could have mobilised more money but would have to pay back a larger sum,” he says.

There is no certainty to say whether the current global economic headwinds which major economies, including India, will not be present over the next few years. And though foreign funds have continued to be net buyers of Indian equities in August 2026, for Rs 23,815 crore, there is no guarantee that this trend will sustain. “In that scenario, with still no confidence in capital flows, it would be difficult to take that incremental risk,” he adds.

In 2013 – when the rupee and investor confidence was ailing, after the ‘taper tantrum’ – the situation was different. “In 2013, investors worried about India's external vulnerability. In 2026, India enters this phase with foreign exchange reserves exceeding $680 billion [now $707 billion], a manageable current account deficit, stronger banking-sector fundamentals and increasing integration into global debt markets,” Quantum Mutual Fund, quotes in its June research paper, comparing the 2013 situation with 2026.

In 2013, India managed to mobilise $34 billion, with $26 billion through FCNR(B) deposits alone. At that time, the scheme was kept open for around three months.

A target in mind?

Some experts say that the RBI possibly had a target in mind at the time of launching the scheme. “They were possibly having their own internal target. But in the initial days and weeks, banks and the RBI were not sure how much they could mobilise,” says a treasury head at a private sector lender, on condition of anonymity.

“But with the dollars coming in, the RBI knew that a high cost has to be borne,” the treasury chief said.

IIFL Capital, in an August 18 note, said: “continuing to attract additional dollars through the scheme could have resulted in the RBI accumulating more foreign currency than necessary while also increasing the associated liabilities and liquidity-management requirements. The RBI appears to have achieved its objective earlier than expected.”

Liquidity can be beneficial for credit growth, but too much liquidity can complicate monetary policy, the IIFL Capital analysts said.

The economist said that the cost of liability for the banks has not changed substantially as the rate of interest which banks have offered (around 6.%) is the same rate offering in domestic market too.

From a current market perspective, the premature closure decision was well thought out and calibrated. The communication should have been more direct to bankers.