RBI CLOSES FOREX DEPOSIT WINDOW FOR NRIs

RBI CLOSES FOREX DEPOSIT WINDOW FOR NRIs

Why in News?

• The Reserve Bank of India (RBI) has decided to prematurely close its special forex swap facility for fresh Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits.
• The fresh deposit mobilisation window will close on 31 August 2026, earlier than originally planned, following an encouraging response.
• The facility has attracted $52.3 billion through FCNR(B) deposits.
• However, banks can continue to undertake swaps against FCNR(B) deposits already mobilised under the facility until 11 September 2026.
• The facilities for External Commercial Borrowings (ECBs) and Overseas Foreign Currency Borrowings (OFCBs) will remain open until 31 December 2026.

WHAT IS SPECIAL FOREX SWAP FACILITY?

• The RBI introduced the special US dollar-rupee forex swap facility on 8 June 2026.
• Under the facility, banks were allowed to mobilise fresh three-to-five-year FCNR(B) deposits from overseas depositors.
• Banks could then swap the foreign currency raised through these deposits with the RBI at a concessional rate.
• The RBI’s arrangement effectively covered the hedging cost for banks.
• This made FCNR(B) deposits a more attractive source of foreign currency funding for Indian banks.

HOW MUCH FOREIGN CURRENCY HAS THE FACILITY ATTRACTED?

• According to data reported by authorised dealer banks, the three components of the special forex facility attracted total foreign currency inflows of $56.846 billion up to 13 August 2026.
• FCNR(B) deposits accounted for the overwhelming majority of the inflows.
• The mobilisation was significantly higher than the initial weeks of the scheme.
• Bankers had earlier expected inflows to accelerate during August and September.

WHAT ARE FCNR (B) DEPOSITS?

• FCNR(B) stands for Foreign Currency Non-Resident (Bank)
• They are deposits that can be opened by:
  • Non-Resident Indians (NRIs)
  • Persons of Indian Origin (PIOs)
• These deposits are maintained in foreign currency rather than Indian rupees.
• They are fully repatriable.
• FCNR(B) deposits are also exempt from tax in India.

WHY DID THE RBI INTRODUCE THE FACILITY?

The facility was part of a broader package announced in June to:

• Encourage foreign capital inflows.
• Strengthen the Indian rupee.
• Support foreign exchange reserves.
• Improve foreign currency liquidity in the banking system.
• Make overseas funding more attractive for Indian banks and companies.

The RBI also:

• Eased norms for state-owned enterprises to borrow overseas.
• Provided a concessional swap facility to encourage ECBs by public sector companies.

WHY WAS THE FACILITY ATTRACTIVE TO BANKS?

• One major challenge in attracting foreign currency deposits is the cost of hedging foreign exchange risk.
• Banks normally have to bear this cost when converting or managing foreign currency liabilities.
• Under the RBI’s special arrangement, the central bank absorbed the hedging cost through concessional swaps.
• This reduced the cost of raising foreign currency funds.
• Banks could therefore offer more attractive interest rates to overseas depositors.

HIGHER INTEREST RATES FOR NRIs

• The RBI temporarily withdrew the interest-rate ceiling on fresh FCNR(B) deposits with three-to-five-year tenors until 30 September 2026.
• Banks subsequently started offering higher rates to attract overseas funds.
• Several banks were offering rates of around 7% on FCNR(B) deposits.

WHY DID THE RBI CLOSE THE FCNR (B) WINDOW EARLY?

• The main reason was the very strong response to the facility.
• FCNR(B) deposits alone brought in $52.3 billion.
• The scale of inflows was much higher than initially expected.
• Therefore, the RBI decided that there was no need to keep the fresh-deposit mobilisation window open until the original deadline.

IMPORTANT DISTINCTION

• Fresh FCNR(B) mobilisation: Closes on 31 August 2026.
• Swaps against FCNR(B) deposits already mobilised: Available until 11 September 2026.
• ECB and OFCB facilities: Remain open until 31 December 2026.

WHAT IS THE RBI FOREX SWAP MECHANISM?

• Under the FCNR(B) facility, the RBI provides a plain buy/sell foreign exchange swap.
• The swap covers the principal amount of eligible FCNR(B) deposits.
• It does not cover the interest component.
• Banks can undertake swaps for less than three years if they have mobilised eligible FCNR(B) deposits having an original maturity of at least three years.

WHAT ABOUT ECBs?

• For External Commercial Borrowings (ECBs), the facility applies to borrowings with an average maturity of three years or more.
• The swap tenor is linked to the repayment schedule or maturity of the ECB.
• The maximum swap period is five years.

WHAT IS THE SIGNIFICANCE FOR THE INDIAN ECONOMY?

1. Supports Foreign Exchange Liquidity

• Large foreign currency inflows improve the availability of foreign exchange in the banking system.
• This can help strengthen overall financial and external-sector stability.

2. Supports the Rupee

• The facility was introduced partly to support the rupee amid currency pressures.
• However, the large inflows do not necessarily mean a sharp appreciation of the rupee.

3. Helps Indian Banks

• Banks receive access to a larger pool of foreign currency funding.
• Lower hedging costs make FCNR(B) deposits more attractive.

4. Supports Capital Inflows

• The scheme encourages overseas investors and NRIs to place funds with Indian banks.
• This helps strengthen India’s external financing position.

5. Strengthens Liquidity and Stability

• According to the CareEdge assessment cited in the source, the scheme should primarily be viewed as a liquidity and stability measure, rather than as a major driver of sharp currency appreciation or reserve accumulation.

WHY MAY FOREX RESERVES NOT RISE SHARPLY?

• Despite large inflows, the rupee has not appreciated significantly because of:
  • Global uncertainties
  • Geopolitical risks
  • Weaker capital-flow dynamics
• The RBI also has substantial forward forex obligations, which may limit any visible increase in reserves.

BACKGROUND: THE 2013 PRECEDENT

• The special swap facility revived a tool that the RBI had previously used in 2013.
• In 2013, the RBI introduced similar measures to attract foreign currency inflows when the rupee was under pressure.
• The 2026 facility was introduced against a similar need to attract foreign capital and support currency and financial stability.

LEVERAGED FCNR (B) DEPOSITS

• Banks are also offering leveraged FCNR deposit structures to overseas investors.
• In this strategy:
  • The investor puts in part of the money from their own funds.
  • Additional foreign currency is borrowed against the deposit through a bank or affiliated overseas lender.
  • The borrowed funds are also invested in FCNR deposits.
• This creates a larger deposit base.

INTEREST RATE ARBITRAGE

• The strategy is based on interest-rate arbitrage.
• If the return on the FCNR deposit is higher than the cost of borrowing, the difference can generate additional returns for the investor.
• However, leveraged structures also involve additional financial and market risks.

OVERALL SIGNIFICANCE

• The RBI’s decision to close the FCNR(B) mobilisation window early reflects the strong response to the special forex facility.
• The $52.3 billion FCNR(B) inflow shows that the concessional swap arrangement and higher deposit rates significantly increased the attractiveness of foreign currency deposits.
• The measure primarily aims at improving foreign exchange liquidity, supporting financial stability and encouraging foreign capital inflows.
• At the same time, the continued opening of ECB and OFCB facilities until 31 December 2026 shows that the RBI continues to support other channels of foreign currency funding.

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