FCNR(B) inflows leave RBI with liquidity, redemption challenges

A special concessional swap window opened by the RBI in June to support the rupee drew $127 billion through FCNR(B) deposits, along with $5.26 billion in overseas foreign currency borrowings and $3.89 billion in external commercial borrowings as of end-August. Forex reserves hit a record $785.7 billion by September 4. But surplus liquidity has crossed ₹11 lakh crore, and the deposits maturing in three to five years could trigger large dollar outflows.

Written by AI from RBI · not yet reviewed by an editor · Published 22 Sept 2026, 6:13 am IST

Source

RBI · read the original report ↗

#rbi#fcnrb#forex reserves#rupee#liquidity#inflation

Desk check · compared with the source

What the desk checked (5)

RBI's special window brought in $127 billion via FCNR(B) deposits, plus $5.26 billion in OFCBs and $3.89 billion in ECBs as of end-August. — Figures appear in the source; attributed to the RBI's special window data, with the source noting final August bank-wise data is not yet released.
Forex reserves reached a record $785.7 billion by September 4, and surplus liquidity crossed ₹11 lakh crore in the first week of September. — Figures stated in source without direct citation to a specific RBI release; internally consistent with the rest of the article.
Retail inflation rose to 4.82% in August from 4.45% in July; WPI inflation hit 9.92% in August; GDP grew 7.8% in April-June. — Official-style data quoted in the source; no release document named.
Governor Sanjay Malhotra said nearly half the deposits are of five-year tenor and about 42% of three to under four years. — Attributed in the source to a television interview by the RBI Governor; interview not named.
Experts differ on whether the FCNR(B) move was needed, with views from Prasanna Tantri (ISB) and Abheek Barua. — Directly attributed quotes from named experts.

Written by AI from RBI · not yet reviewed by an editor · How we use AI · Report an error

Analysts’ view opinion

AI Economic Analyst

The RBI bought external stability cheaply in headline terms but expensively in balance-sheet terms: $127 billion of FCNR(B) money plus roughly $9 billion via OFCBs and ECBs has pushed reserves to a record $785.7 billion, yet the rupee side of the same swap has left over Rs 11 lakh crore sloshing around the banking system. That is a classic trade-off — a bigger shock absorber for the currency and the trade deficit today, in exchange for harder monetary transmission and a dollar redemption bill in three to five years. With CPI at 4.82% and WPI near 10%, the cost of that liquidity is being paid partly through inflation risk and partly through the RBI's own sterilisation and hedging costs, while depositors and the banks that mobilised the money were the clear immediate gainers.

Who gains now: non-resident depositors earning 6-7% instead of the usual 3-4%, and banks — especially large private and foreign lenders — that got cheap bulk funding with the RBI absorbing the hedging cost.
Who pays: the RBI's balance sheet, via hedging costs and the price of mopping up liquidity through Rs 1 lakh crore of bond sales and Rs 2.4 lakh crore of VRRR absorption, and potentially households if excess liquidity feeds prices.
Growth channel is genuine but bounded — cheaper funding reduces the deposit war and could support the 13-15% credit growth Moody's expects, though the story notes limited lending opportunities for a sum this large.
The policy signals now conflict: firm 7.8% GDP growth and above-target inflation argue for a hike towards the 6.5% repo some economists flag, while surplus liquidity pulls short-term rates the other way.
The deferred cost is the redemption wall — with roughly half the deposits at five years and about 42% at three to under four years, plus leverage of up to 19-29 times at some foreign banks, the outflow lands in conditions nobody can price today.

What to watch — Watch the October MPC for whether the RBI hikes while still draining liquidity, and how aggressively it leans on longer-tenor VRRRs, the SDF and open market sales to keep short-term rates anchored to the policy rate.

The story does not establish how much of the rupee's move from 95.74 to above 94.5 was actually caused by these inflows rather than other factors, nor does it settle whether the scheme was necessary — final end-August bank-wise data is still unreleased and experts quoted are openly divided.

Deep dive

Research brief · 8 facts · 10 dates · exam-ready

The brief

Context

In June 2026, with the rupee under pressure from a renewed West Asia (US-Iran) war, surging crude prices and heavy FPI selling, the RBI opened a special concessional swap window to let banks raise foreign currency non-resident (bank) — FCNR(B) — deposits, with the central bank bearing the hedging cost on the principal. The window drew $127 billion, far more than expected, pushing forex reserves to a record $785.7 billion by September 4, 2026, and the RBI closed it a month early on August 31. But because banks swap the dollars with the RBI for rupees, domestic surplus liquidity has crossed ₹11 lakh crore, and the deposits maturing in three to five years create a future dollar outflow risk. A similar window in 2013, after the US Fed's taper signal, had mobilised about $26 billion.

Key facts

The RBI's special concessional swap window opened in June 2026 drew $127 billion through FCNR(B) deposits, plus $5.26 billion via OFCBs and $3.89 billion via ECBs as of end-August.
Forex reserves hit a record $785.7 billion by September 4, 2026; surplus banking liquidity crossed ₹11 lakh crore in the first week of September.
Banks offered 6-7% on FCNR(B) deposits during the window, against 3-4% typically offered earlier; deposits mature in three to five years.
The FCNR(B) window was closed early on August 31, 2026 (planned September 30); OFCB and ECB windows stay open till end-December 2026.
Governor Sanjay Malhotra said nearly half the deposits are five-year tenor and about 42% are three-year to under four-year.
HSBC's FCNR(B) outstanding rose from $120.3 million on June 5, 2026 to $6.26 billion on July 30; Standard Chartered's stood at $1.86 billion on July 30 (Finance Ministry data in Lok Sabha, August 3).
Foreign banks offered leverage of 19-29 times and select private banks 12-15 times on FCNR(B), against the usual nine times, per CareEdge Ratings.
Retail inflation was 4.82% in August vs 4.45% in July (third month above the 4% target); WPI inflation hit 9.92% in August; Q1 (April-June) GDP growth was 7.8%; repo rate is 5.25%.

Timeline

2013RBI used a similar FCNR(B) swap window after the US Fed's taper signal, mobilising about $26 billion; rupee recovered 8%.
May 20, 2026Rupee slumped to a record low of 96.96 against the US dollar.
May-June 2026Bank Indonesia raised interest rates by 100 basis points to stabilise its currency.
June 2026RBI announced the special concessional FCNR(B) swap window amid the US-Iran war, surging crude and FPI selling; rupee at 95.74 in early June.
August 3, 2026Finance Ministry data in Lok Sabha showed large private banks led FCNR(B) mobilisation, with foreign banks also garnering a big share.
August 31, 2026RBI closed the FCNR(B) special window a month ahead of the planned September 30 date.
September 4, 2026Forex reserves reached a record $785.7 billion.
September 11, 2026RBI announced open market sovereign bond sales to mop up ₹1 lakh crore in three tranches.
September 16, 2026US Federal Reserve raised rates for the first time in three years.
September 17, 2026RBI absorbed ₹2.4 lakh crore via VRRR auctions; rupee breached 96 to the dollar intraday.

Who has a stake

Reserve Bank of India — Must sterilise ₹11 lakh crore surplus liquidity, keep short-term rates aligned with the 5.25% repo, bear hedging cost on principal and manage forward liabilities from 2029.
Banks (private, public, foreign) — Cheap FCNR(B) funds reduce competition for domestic deposits and wholesale funding costs, but they bear hedging cost on the interest component (~20 bps higher effective cost).
Depositors / non-resident investors — Earned 6-7% on FCNR(B) versus 3-4% earlier, with leveraged structures magnifying deposit size and returns.
Rupee and forex market — Rupee recovered to above 94.5 by early September from 95.74 in early June, but breached 96 intraday on September 17 amid conflict re-escalation.
Borrowers and the economy — Excess liquidity may support credit growth (Moody's sees 13-15%) but risks abnormal festive-season lending and adds to inflation pressure.
Government / Finance Ministry — External stability and financial stability credentials; disclosed bank-wise FCNR(B) data in Parliament.

Why it matters

A record $785.7 billion war chest gives India a large buffer against forex volatility, oil shocks and global risk-off swings at a time of renewed West Asia conflict. But the same inflows have injected over ₹11 lakh crore of surplus rupee liquidity just as CPI (4.82%) and WPI (9.92%) inflation firm up, complicating monetary transmission and pushing the RBI toward a rate hike. And the dollars are borrowed, not earned — repayment pressure lands from 2029, when global conditions may be far less benign.

UPSC angle

Prelims pointers

FCNR(B): foreign currency non-resident (bank) deposits, held in freely convertible currencies like USD, euro, pound; RBI's swap for rupees was only in US dollars.
Forex reserves record: $785.7 billion as of September 4, 2026; FCNR(B) special window raised $127 billion versus about $26 billion in 2013.
RBI liquidity tools named: variable rate reverse repo (VRRR), standing deposit facility (SDF, uncollateralised), and open market bond sales.
Repo rate stood at 5.25%; CPI inflation 4.82% in August 2026, WPI 9.92%; GDP growth 7.8% in April-June 2026.
Rupee's record low was 96.96 on May 20, 2026; it recovered above 94.5 by early September 2026.
Soumya Kanti Ghosh is a Member of the 16th Finance Commission and Group Chief Economic Adviser, SBI; RBI Governor is Sanjay Malhotra.

Mains framing

The 2026 FCNR(B) episode illustrates the classic trilemma facing an open emerging economy: defending the exchange rate, sterilising the resulting domestic liquidity, and retaining monetary policy autonomy. Triggered by the West Asia war, oil-driven import bills and FPI outflows, the RBI's concessional swap window — where it bore the hedging cost on the principal and permitted lending against deposits — attracted $127 billion, five times the 2013 mobilisation, lifting reserves to $785.7 billion and helping the rupee recover from 96.96 to above 94.5. The costs are threefold: over ₹11 lakh crore of surplus liquidity that drags short-term rates below the 5.25% repo just as CPI (4.82%) and WPI (9.92%) harden and a deficient monsoon threatens food prices; a forward premium cost of 2.5-3.5% a year on the RBI's books, which SBI's Ghosh argues is more than offset by reserve deployment income; and a bunched redemption risk from 2029, since nearly half the deposits are five-year and 42% three-to-four-year. Critics such as ISB's Tantri argue no forex emergency existed and a conventional rate hike, as Bank Indonesia's 100 bps move, would have sufficed; supporters such as Barua counter that short-term stability in a currency crisis outweighs deferred costs. The way forward, as suggested in the story, lies in continued VRRR and longer-tenor absorption, SDF use and selective OMO sales, earmarking part of reserves against these liabilities, gradual dollar purchases to trim forward books, and maintaining a positive real interest rate of about 1.5% to keep FDI and FPI flows anchored.

Key terms

FCNR(B) deposit: Foreign Currency Non-Resident (Bank) deposit: a term deposit NRIs hold in a freely convertible foreign currency with Indian banks, free of rupee exchange risk for the depositor.
Concessional swap window: Facility where banks exchange FCNR(B) dollars with the RBI for rupees on favourable terms, with the RBI bearing the hedging cost on the principal, and reverse the swap at maturity.
VRRR (variable rate reverse repo): Auction through which the RBI borrows surplus funds from banks at market-determined rates to absorb excess liquidity; the RBI took in ₹2.4 lakh crore on September 17.
Standing Deposit Facility (SDF): Window where banks park surplus funds with the RBI without any collateral, used as a liquidity absorption tool.
Leveraged FCNR(B) deposit: Structure where an investor puts in some own funds and borrows more foreign currency against the deposit, inflating the deposit base; leverage went up to 19-29 times at foreign banks.
OFCB and ECB: Overseas foreign currency borrowings and external commercial borrowings — offshore debt routes for Indian banks and firms; their special windows run till end-December 2026.

Practice questions

Evaluate the RBI's use of a concessional FCNR(B) swap window in 2026 as an instrument of exchange rate management. What are its implications for domestic liquidity and monetary policy transmission?
"Borrowed reserves are not earned reserves." Discuss with reference to the $127 billion FCNR(B) mobilisation and the redemption pressures expected from 2029.
Examine the tools available to the RBI for sterilising surplus liquidity, and assess their adequacy in an environment of rising CPI and WPI inflation alongside 7.8% GDP growth.

Grounded only in the source report — figures and dates are the source's, not inferred.

Next storyCabinet approves Rs 10,000 crore aviation fuel price stabilization support →

← All stories