Why RBI is returning to a ‘terrible’ idea to boost foreign inflows

The Reserve Bank of India announced a revival of the Foreign Currency Non-Resident (Bank) — FCNR(B) — deposit swap scheme, under which the RBI will bear the ...

What Happened

The Reserve Bank of India announced a revival of the Foreign Currency Non-Resident (Bank) — FCNR(B) — deposit swap scheme, under which the RBI will bear the full hedging cost for authorised dealer banks raising fresh three- to five-year FCNR(B) deposits, until September 30, 2026.
The scheme makes FCNR(B) deposits significantly more attractive to Non-Resident Indians (NRIs) by enabling banks to offer deposit rates 150–200 basis points (bps) higher than current levels, since banks' hedging cost burden is removed.
FCNR(B) deposits raised under this scheme will be exempt from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements — the same concession applied in the 2013 scheme.
Analysts estimate the scheme could attract inflows exceeding the $34 billion mobilised under the landmark 2013 FCNR(B) swap scheme, though some caution the impact may be less pronounced given different global conditions.
The objective is to boost foreign currency inflows, build forex reserves, and support the Indian rupee amid weak capital flows and elevated oil import costs.

Static Topic Bridges

FCNR(B) Deposits: Mechanism and Purpose

Foreign Currency Non-Resident (Bank) — FCNR(B) — accounts are fixed-term deposit accounts available to Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs). Deposits are held in foreign currencies (USD, GBP, EUR, JPY, AUD, CAD) and are fully repatriable.

FCNR(B) deposits are maintained in foreign currency — unlike NRE accounts (Indian rupees) or NRO accounts (Indian rupees, restricted repatriation).
On maturity, both principal and interest are repatriable without restrictions.
Interest earned on FCNR(B) deposits is exempt from Indian income tax for NRIs.
The "B" in FCNR(B) refers to "Banks" — these are bank-held deposits, distinguishing them from the older FCNR(A) accounts (retired).
Governed by: Foreign Exchange Management Act (FEMA), 1999; RBI Master Directions on Non-Resident deposits.

Connection to this news: By bearing the hedging cost (typically ~3% per annum) that banks incur when converting foreign currency deposits into rupees for domestic lending, the RBI effectively subsidises the scheme — making it attractive for NRIs to park funds in India and for banks to mobilise them aggressively.

Currency Swap Mechanism: How the RBI Bears Hedging Cost

When a bank accepts a dollar deposit from an NRI, it needs to convert the dollars into rupees for domestic deployment. To protect against exchange rate risk on repayment, the bank hedges — typically through a forward exchange contract or swap. This hedging has a cost (around 3% per annum, based on the interest rate differential between India and the US).

In the 2013 scheme: Banks swapped dollars with the RBI at a concessional fixed rate of 3.5% (below prevailing market rates of ~7–8%), effectively shifting the currency risk to the RBI.
In the 2026 scheme: The RBI bears the full hedging cost, enabling banks to offer deposit rates 150–200 bps higher than otherwise possible.
The trade-off for the RBI: It assumes exchange rate risk on the swap. If the rupee depreciates more than the swap rate implies, the RBI bears the difference.
The RBI's rationale: The inflow of foreign currency strengthens the rupee immediately (reducing import costs and inflationary pressure) — the benefit is expected to outweigh the hedging cost.

Connection to this news: This is why critics called the original 2013 scheme a "terrible" idea — the RBI was effectively subsidising dollar inflows by taking on contingent foreign exchange losses. The 2026 revival involves the same trade-off: short-term stability at the cost of potential balance sheet risk.

The 2013 FCNR(B) Precedent

In September 2013, the Indian rupee was under severe depreciation pressure (breaching 68/USD), partly due to the US Federal Reserve's "taper tantrum" (tapering of QE announced by Fed Chairman Ben Bernanke). The RBI under Governor Raghuram Rajan launched a special FCNR(B) swap window to attract NRI deposits.

Scheme announced: September 4, 2013.
Target at announcement: ~$10 billion; actual mobilisation: ~$34 billion.
Tenure: 3–5 year deposits with a fixed swap rate of 3.5%.
CRR and SLR exemptions were provided to incentivise banks.
Redemption in 2016 caused brief rupee pressure as deposits matured, requiring the RBI to carefully manage the outflow.
Critics' concern: The RBI had to absorb potential losses if the rupee depreciated more than built into the swap rate — the "terrible" label came from economists who argued it was an implicit subsidy that distorted market pricing.

Connection to this news: The 2026 revival draws directly on the 2013 playbook, with enhancements (full hedging cost borne by RBI, not just a subsidised swap rate). The precedent is significant because the 2013 scheme worked — it rapidly stabilised the rupee — but the maturity-redemption cycle created subsequent challenges.

Forex Reserves and External Vulnerability

India's foreign exchange reserves serve as a buffer against external shocks — currency depreciation, capital outflows, and import payment obligations.

The Reserve Bank of India manages forex reserves, which include foreign currency assets (the largest component), gold, Special Drawing Rights (SDRs), and India's reserve tranche at the IMF.
Adequate reserves are assessed against import cover (months of imports) and the Guidotti-Greenspan rule (reserves should cover short-term external debt).
Weak capital flows + high oil import costs (Iran war effect) reduced the accretion to reserves in early FY27, motivating the FCNR(B) scheme.
A higher FCNR(B) inflow would directly build the foreign currency assets component of reserves.

Connection to this news: The RBI's decision to revive this scheme is a direct response to the external sector stress from the Iran war — higher oil prices draining forex, weak FPI inflows under global risk-off sentiment, and a need to signal policy credibility on the rupee.

Key Facts & Data

Scheme: FCNR(B) Deposit Swap Scheme 2026
Deadline: RBI bears full hedging cost for deposits until September 30, 2026
Eligible tenures: 3 to 5 years
Expected rate premium for NRIs: 150–200 basis points above current deposit rates
CRR and SLR exemption: Yes (same as 2013)
2013 precedent: ~$34 billion mobilised (target was $10 billion)
Hedging cost borne by RBI: ~3% per annum
Governing law: FEMA 1999; RBI Act 1934
FCNR(B) account currencies: USD, GBP, EUR, JPY, AUD, CAD
Key risk: RBI bears currency risk on swap if rupee depreciates more than implied rate