The story so far: The Reserve Bank of India (RBI) introduced a special swap facility in June to encourage non-resident Indians to put money into FCNR(B) deposits, as the rupee faced pressure from high oil prices and India sought to strengthen its foreign-exchange reserves.

The response was much stronger than the RBI’s initial target, as Indian banks mobilised more than $127 billion through these deposits, against an initial target of about $50 billion. The RBI subsequently closed the window for fresh FCNR(B) deposits on August 31, 2026.

The scheme has given banks a relatively cheap source of foreign-currency funding and added substantially to India’s foreign-exchange reserves. The deposits typically have three-to-five-year maturities, raising the question of who bears the currency risk when the principal and interest have to be paid.

What risk does the RBI take?

The RBI’s special swap facility shields banks from foreign-exchange risk on the principal amount of the FCNR(B) deposits. Reuters reported that the interest payments, however, have to be managed by the banks independently.

Under the arrangement, the RBI bears the cost of hedging the foreign-currency exposure, according to a BofA Securities Research report. It estimated that this hedging cost could be up to 3%, while SBI Research used an average hedging cost of around 3% a year in its calculations.

So, the RBI’s cost comes from protecting the dollar value of the principal against movements in the rupee-dollar exchange rate.

How does the RBI handle this cost?

The RBI has received foreign currency through the deposits, adding to the country’s reserves. SBI Research said the RBI had recouped $31.2 billion of its foreign-currency assets by August 7, 2026, equivalent to 55% of the amount mobilised at that point. It also said the RBI may use part of the amount to invest in U.S. securities because of higher yields.

BofA estimated that the RBI could earn around 4.5-5% on the foreign reserves generated through the deposits. It said this could potentially more than offset a hedging cost of up to 3%, assuming the foreign-currency holdings are hedged for five years.

SBI Research assumed FCNR(B) mobilisation of $65-70 billion and a 3% annual hedging cost, and calculated an annual notional cost of about $2.1 billion. If that cost remained at 3% for five years, the cumulative cost would be about $10.5 billion.

It argued that this cost is relatively small compared with India’s foreign-exchange reserves. Against current reserves of around $700 billion, it calculated the five-year cost at 1.45% of the reserve stock.

What risk do banks still take?

The RBI’s swap does not cover the interest that banks have to pay depositors in dollars.

That means banks have to arrange the dollars needed for these interest payments and manage the foreign-exchange exposure themselves. Reuters reported that foreign banks are largely hedging this exposure, while most state-run banks and several private-sector Indian lenders have left it unhedged.

Why are some banks leaving the interest exposure unhedged?

The main reason cited by bankers is the cost of hedging.

Reuters reported that hedging the foreign-exchange risk on interest payments for three-to-five-year deposits costs banks about 3% a year. The interest on these deposits is paid when the deposits mature.

Some banks have therefore chosen not to pay that cost and instead plan to buy dollars when they actually need to make the interest payments.

One banker at a mid-sized state-run lender told Reuters that the bank expected to handle the payments through spot dollar purchases when required, rather than locking in protection in advance.

What happens if the rupee weakens?

Consider a bank that has to pay $1 million in interest.

If the dollar costs ₹95, the payment would require ₹9.5 crore. If the rupee weakens and the dollar rises to ₹100 at the point of maturity, the same $1 million payment would require ₹10 crore.

A bank that has hedged its exposure would have protection against such a currency movement. A bank that has left the exposure unhedged would have to bear the higher rupee cost.

This could become a broader concern because much of the future interest-payment exposure has been left unhedged. If the rupee weakens significantly, banks could need to buy dollars at the same time to meet their interest obligations. That could increase demand for dollars and add to pressure on the rupee.

That means the FCNR(B) scheme has not eliminated currency exposure altogether. The RBI has taken on the exposure associated with the principal through its swap, while banks continue to face currency risk on the interest payments in the future.

The central bank may prioritise closing its $137 billion open short forward dollar positions , with the FCNR(B) deposits received , according to experts and industry insiders.  

“The RBI has an outstanding short forward position of USD 137 Bn. If the RBI decides to not roll over the outstanding positions the INR liquidity will be absorbed from the banking system and RBI may use the excess FX reserves generated from the FCNR (B) scheme for delivering the dollars,” said Shashi Dhar, Chief General Manager of Treasury & Global Markets at Bank of Baroda. Short forward dollars are currency derivative contracts where RBI commits to sell dollars at a future date at a predetermined rate. This is used to defend the rupee without drawing down spot reserves immediately.

The central bank had already begun absorbing rupee liquidity to make sure call rates don’t fall below policy rate, he continued. Mr. Dhar further said that liquidity is at ₹6.5 lakh crore and RBI may absorb some of this to make sure short-term money supply does not feed into inflation and keep borrowing cost aligned with policy rate. This became important as the RBI signalled an expectation of higher inflation, in its monetary policy committee meeting minutes. 

Meanwhile, banks may be inclined to use this to “bolster their asset-side books and reduce their dependence on wholesale deposits  in the immediate term” Mr.Dhar said, adding that in the long term, they can use the excessive liquidity to fund credit growth.

One of the predominant reasons for introducing the FCNR(B) scheme was to arrest increasing foreign exchange rate. The rupee has become cheaper by 7.22% against the dollar, trading at around ₹96 against the greenback.

Economists however express their concerns regarding structural depreciation of the rupee even amid whopping FCNR(B) inflows.  “FCNR is one of the aspects that we tried to consider to create a solution to a problem that was a perfect storm but for us to become extremely secure with the way we manage our currency, we will need to get embedded in global value chains,” said Garima Kapoor , Deputy Head of Research and Economist at Elara Capital. “ In my view, FCNR or no FCNR, I do not think the rupee has a pathway for structural appreciation,” she said.