For decades, the Foreign Currency Non‑Resident (Bank) or FCNR(B) scheme has been a popular savings option among NRIs. In 2024-25, it fetched US$16.16 billion. In 2025-26, it was a tad lower at US$11.12 billion. This has been used by the Reserve Bank to shore up foreign exchange reserves.

In order to mop up more forex, the Reserve Bank opened a swap window on June 8 to enable commercial banks to raise foreign currency deposits by offering better interest rates. Many see this move by the RBI to cushion the Indian rupee, which has been one of the worst-performing currencies in Asia.

Swap Window Till August 31

This swap window will now be terminated on August 31, one month prior to the scheduled date of September 30.

This has come as a surprise to market participants. The swap scheme is estimated to cost the RBI a massive US$10.5 billion in hedging over five years.

The RBI has thrashed this out with an eye to garner a larger quantum of foreign currency in view of rising geopolitical uncertainty and the ongoing West Asian crisis.

“The decision to close it early comes as a surprise to market participants even as in the last media interaction the RBI Governor had clearly indicated that there was no intention to close the scheme early in response to a pointed question in the media interaction,” the SBI Research Ecowrap said.

Similar Prescription Under Rajan

Taking a leaf out of the playbook of former RBI Governor Raghuram Rajan, Malhotra on June 5 announced a facility to open the swap window to enable banks to raise foreign currency deposits.

The hedging cost for banks for raising fresh 3–5-year FCNR (B) deposits will be borne by the RBI.

As the scheme has already yielded more than US$ 56.84 billion in FCNR(B) deposits until August 13, the RBI decided to advance the closure date by a month. According to a State Bank of India (SBI) Research Ecowrap, the total collections could rise to US$ 85 billion by August 31.

FCNR(B) And Swap Window

Under the FCNR(B) scheme, which is regulated by the Reserve Bank, commercial banks are permitted to accept term deposits from Non‑Resident Indians (NRIs) and Overseas Citizens of India (OCIs) in freely convertible foreign currencies like the greenback, British pounds, Euro and Japanese yen, among others, for periods ranging from one to five years.

The principal and interest earned on deposits are fully repatriable. The interest rate is subject to the RBI-prescribed ceiling, which is linked to a reference rate with specified markups.

The commercial banks used to offer interest rates ranging from 2.9% to 4.4% depending upon the tenure of deposit. Also, there is no income tax liability on interest earned. The exchange risk is borne by the banks, and the depositors get back the principal along with interest in foreign currency.

Importance Of FCNR(B)

It is a continuing scheme and is popular among millions of Indians working in the Gulf region, although there is no bar on NRIs or OCIs residing in other countries from taking advantage of the scheme.

In order to garner larger foreign currency deposits in times of need, the Reserve Bank sweetens the deal by opening a limited-period swap window and removing the ceiling on deposit rates. Under the swap facility, commercial banks exchange the foreign currency deposits for Indian rupees by handing over the amount collected to the Reserve Bank. At the time of maturity, the transaction is reversed, and the commercial banks receive the foreign currency for onward payment to depositors.

The exchange risk under the swap facility is borne, fully or partially, by the Reserve Bank. This swap facility enables banks to offer higher interest rates, over and above the ceiling rate prescribed by the RBI, to the depositors. The special swap window helps the country garner a larger amount of foreign exchange, albeit at a cost. Also, there is a drawdown on the country’s foreign exchange reserves at the time of maturity of deposits.

Ideally, the Reserve Bank should open this window to attract costly foreign currency deposits to meet a temporary external crisis, as it did in 2013.

FCNR(B) 2013

In 2013, India was branded one of the ‘fragile five’ emerging economies. Following the US Federal Reserve's ‘taper tantrums’, capital started fleeing emerging markets at a record pace. The Indian Rupee was in freefall, the current account deficit (CAD) spiked to an alarming 4.8% of GDP, and foreign exchange reserves dwindled to roughly US$275 billion—barely enough to cover six months of imports.

Under those circumstances, triggered by the withdrawal of monetary policy concessions given by the US Fed to tide over the crisis following the collapse of Lehman Brothers, the 2013 FCNR(B) swap window became a necessity. The then Reserve Bank Governor Raghuram Rajan used the swap window as an emergency defense mechanism to stave off a balance of payments crisis. It successfully brought in US$26 billion in FCNR(B) deposits and US$8 billion as External Commercial Borrowings (ECBs) during the three-month swap window.

The initiative helped in restoring confidence of investors in the Indian economy. The rupee, which was at 65.70 to a dollar on August 31, 2013, appreciated to ₹62.45 on November 29, 2013 (4.9% appreciation). Post the closure of the FCNR(B) scheme, the rupee settled at 59.89 to a dollar (8.8% appreciation from August 2013), said the SBI report.

FCNR(B) 2026 Under Malhotra

Things have dramatically changed for the better since then. India today is the fastest-growing major economy in the world. The country has been described as a ‘bright spot’ by the International Monetary Fund (IMF).  The foreign exchange reserves had soared to more than US$ 682 billion, adequate to cover 11 months of the export bill, before the launch of the swap window, and the Current Account Deficit (CAD) was 0.6% of GDP during 2025-26.

 “As of May 29, 2026, India’s foreign exchange reserves stood at a healthy US$682.3 billion, adequate in terms of the standard metrics of reserve adequacy, including import cover (about 11 months) and external debt (89.1%).

“Various policy initiatives are expected to strengthen our balance of payments. These include the recent agreements with major trading partners, opening the insurance sector to 100% FDI, ethanol blending program, push for energy transition, easing of FDI restrictions for land-bordering countries, liberalisation of the ECB framework, and several others”, Malhotra had said while announcing the bi-monthly monetary policy on June 5.

Although the external sector was under pressure on account of the crisis in West Asia, withdrawal of foreign portfolio investment, rising oil and fertilizer import bill and declining value of rupee, the need for opening a swap window to garner foreign capital at considerable cost is questionable. It was apparently to arrest the declining value of the rupee.

Montek Singh Ahluwalia, former Deputy Chairman of the erstwhile Planning Commission, told The Secretariat that “If India does well, the rupee will strengthen… If you try to strengthen it artificially, the economy will become weaker.”

Seeking to garner foreign capital fast, the RBI considerably sweetened the FCNR(B) 2026 swap window as compared to the earlier initiative. In 2013, the RBI charged banks a concessional 3.5% swap fee, sharing the cost burden. The central bank this time around decided to absorb 100% of the currency-hedging cost.

If India does well, the rupee will strengthen… If you try to strengthen it artificially, the economy will become weaker

– Montek Singh Ahluwalia, former Deputy Chairman of the erstwhile Planning Commission

By deciding to shoulder the entire burden, the RBI effectively allowed banks to offer elevated interest rates between 6.0% and 7.1% on foreign currency deposits, while eliminating currency risk for lenders. Additionally, the RBI granted total exemptions on Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements for these funds, giving commercial banks maximum advantage.

As a result, foreign capital flowed in, especially from the NRIs in the Gulf region and countries like Singapore, which do not levy income tax on overseas income. For NRIs, it meant high interest income with zero tax liability and no currency fluctuation risk. Both public and private sector banks, including SBI, Bank of Baroda, HDFC Bank and ICICI Bank, went aggressive with the scheme and helped the nation garner US$52.3 billion through FCNR (B) deposits in less than eleven weeks of the opening of the window.

The total collections are likely to go up to US$85 billion by August 31, the revised date for closure of the swap window.

"… FCNR(B) inflows could strengthen foreign-currency funding and ease pressure on market liquidity,” Sanjay Chaturvedi, Chief Treasury Officer, Namdev Finvest said while commenting on the latest RBI monetary policy meetings.

Expensive Strategy

Has RBI gone overboard with an aggressive dollar-gathering exercise at a time when India’s external balance sheet required no such artificial intervention?

Probably yes, as India's external sector in 2026 does not require an emergency injection of expensive foreign capital. There is no foreign currency run, no balance of payments distress, and no threat to external solvency.

“With current reserves at around US$700 billion and incremental reserve accumulation assumed at roughly US $20 billion annually, the five-year cumulative hedging cost of US$10.5 billion would amount to only 1.45% of the current reserve stock and around 1.27% of the projected reserve stock,” said the SBI research Ecowrap.

The inflow of FCNR(B) deposits does not seem to be having any significant impact on the value of the rupee, which closed at 95.71 to a dollar on Friday.

By treating an economy sitting on high forex reserves as if it were facing a 2013-style liquidity squeeze, the central bank has gone overboard by saddling itself with unnecessary fiscal obligations. Building foreign reserves is a prudent goal, but accumulating liability-driven capital at substantial cost is an expensive strategy.