Reserve Bank of India (RBI). File
| Photo Credit:
Reuters
Foreign currency non-resident (Bank) or FCNR(B) deposits, which were introduced in 1993, will prove to be a litmus test for the country’s ability to mobilise long-term foreign currency resources from its vast global diaspora.
At a time of geopolitical fragmentation, volatile capital flows and uncertain interest-rate cycles (as inflation risks persist) that are redefining international finance, these instruments have become a strategic macroeconomic rupee stabilisation tool, but at the risk of increasing external liabilities.
The Reserve Bank of India (RBI) revived the FCNR(B) concessional swap window, last used when Dr. Raghuram Rajan was the Governor, to strengthen foreign exchange (forex) reserves, helping defend the rupee, which has depreciated 12% year-on-year (July 22) vis-a-vis the U.S. Greenback, reflecting the elevated geopolitical risks, stronger dollar, higher import dependence and recently negative foreign direct investments (FDI).
Design features
The FCNR(B) deposits — designed to pre-empt external vulnerabilities — provide relatively stable, medium-term foreign currency resources compared to volatile foreign portfolio investors, whose total withdrawals from Indian equities stood at ₹2.87 lakh crore between January and first week of June 2026, surpassing the ₹1.66 lakh crore pulled out during the entire calendar year 2025.
The RBI launched a special FCNR(B) deposit framework for fresh deposits mobilised until September 30, 2026, to attract foreign currency inflows from NRIs/PIOs/OICs, making it one of the central pillars of India’s external financing strategy.
The new scheme, which allows banks to offer higher interest rates by bearing hedging costs, aims to attract $50-70 billion. It comes at a time when FCNR(B) deposit inflows have weakened sharply, with net inflows dropping to just $946 million in FY26 from $7.1 billion in FY25, a decline of nearly 86%.
Under the new arrangement, the RBI is offering a concessional foreign exchange swap facility to banks for FCNR(B) deposits with maturities ranging from three to five years, significantly reducing the cost of hedging foreign currency exposure. This implies around a 3% discount to prevailing FX swap rates of 2.8% to 3.3% for the 3-5 year tenor.
For NRIs and other eligible investors looking to park foreign currency deposits in India without taking rupee exchange-rate risk, the RBI measures could translate into higher returns and more attractive deposit offerings.
Most large banks offer around 6% and some smaller/private banks offer up to 7.1% under the RBI swap window compared to virtually risk-free, highly liquid U.S. Treasury carrying 4-4.4%.
Normally, banks cannot sustainably offer dollar deposit rates substantially above U.S. Treasury yields because of hedging costs. The RBI’s swap window has effectively removed much of that cost, enabling banks to offer higher returns on U.S. dollar deposits than U.S. government securities yield. This temporary interest-rate premium explains the surge in NRI interest and the strong inflows witnessed since the scheme’s launch.
So far, going by the data, the response from the Indian diaspora has been phenomenal as total foreign currency mobilisation reached $20.72 billion, of which $17.4 billion (at the time of writing) or 84% came through FCNR(B) deposits alone; making it the dominant source of inflows. under the scheme, which represent a significant structural advantage. Most of the inflows across the industry are expected to trickle in during the latter half of August and September.
Quoting economists, Reuters on Wednesday (July 22, 2026) said the RBI has likely used part of the initial inflows from its foreign-currency deposit drive to unwind a portion of massive forex forward book.
Deposits are maintained in designated foreign currencies such as the U.S. Dollar, Pound Sterling, Euro, Japanese Yen, Australian Dollar and Canadian Dollar. Both principal and interest remain denominated in foreign currency, insulating depositors from rupee depreciation.
Days of yore
Historically, India’s external stress coincided with underlying vulnerabilities, including wide current account deficits, limited forex reserves, or constrained access to global capital.
The country had seen Resurgent India Bonds (RIB) in 1998, India Millennium Deposits (IMD) in 2000 and FCNR(B) deposits in 2013, each of which had a common mandate of raising forex reserves but were fundamentally different in character and structure.
RIBs — issued by State Bank of India (SBI) with sovereign/RBI backing — were a one-time emergency fundraising after India conducted the Pokhran-II nuclear tests, triggering economic sanctions by the U.S. and several Western nations.
IMDs were a series of foreign currency deposits introduced in 2000 by SBI to bolster India’s forex reserves and stabilize the rupee in the wake of post-Pokhran sanctions and dotcom bust.
In 2013, during the “taper tantrum”, banks raised about $34 billion from Indian diaspora to help stabilise the currency through the first edition of FCNR(B).
Current phase
Unlike earlier stress episodes, the current phase is unfolding against a backdrop of significantly stronger macroeconomic fundamentals and FCNR(B) deposits are now being deployed amid elevated global uncertainty, volatile capital flows, persistent geopolitical conflicts and an evolving global interest-rate cycle.
With forex reserves of more than $650 billion, no balance-of-payments crisis, and investment-grade macroeconomic fundamentals, the RBI aims to build additional buffers against geopolitical uncertainty and volatile capital flows.
While the RBI’s swap facility has greatly boosted FCNR(B) mobilisation, sustaining inflows — notably from West Asia, which accounts for nearly 50% of India’s inward remittances — will become increasingly challenging if geopolitical tensions persist, labour market conditions weaken, and remittance growth slows.
Although India continues to receive the world’s largest remittance inflows (about $129 billion in 2024, according to the World Bank), growth from Gulf countries has moderated as governments pursue labour nationalisation policies, oil-price volatility affects fiscal spending and infrastructure projects, and hiring of expatriate workers slows in certain sectors.
With West Asia on a turmoil, banks, especially in the Gulf countries are offering competitive dollar deposit rates, making it difficult for the Indian lenders to compete.
Reuters had reported that the UAE banks are stepping up generous deposit offers as they face digital rivals and war risks.
There have been reports that the RBI and the UAE Central Bank have had parleys on reported concerns of crowding out due to Indian banks’ dollar deposits.
Small and mid-sized private sector banks, which neither have overseas branches nor a GIFT City presence, , are now exploring tie-ups with large Indian banks that have a presence in GIFT City so that their NRI customers can get the benefit from leverage FCNR(B) deposits.
Although FCNR(B) deposits eliminate exchange-rate risk for depositors, NRIs may still compare returns with the U.S. treasury securities, global money market funds, and dollar bonds. If global interest rates stay elevated, the relative attractiveness of FCNR(B) deposits diminishes.
