FCNR(B) WINDOW – AN UNPRECEDENTED SHOW

FCNR(B) WINDOW – AN UNPRECEDENTED SHOW

On September 02, 2026, the RBI released the final figures for the collection of FCNR(B) deposits and via OFCBs and ECBs. The table captures the flows as of 31-August.

Data Source: RBI

Only the FCNR(B) window (with RBI sponsored forex cover) closes on 31-August. In the case of OFCBs, and ECBs, where the RBI is providing partial cover, the window is open till the end of December 2026. Technically, the FCNR(B) window is also open, but without the RBI sponsored hedge. That means, banks will cut down the rate of interest on deposits, which literally makes the product unattractive.

While the RBI window has closed for fresh deposits, the banks can swap these deposits with the RBI till 11-September. In terms of comparison with the previous scheme in 2013, the 2026 flows are nearly 5 times, compared to the $26 billion collected in the earlier round.

FCNR(B) HAS DIRECT AND INDIRECT COSTS TO INDIA

The FCNR(B) deposits will have direct and indirect costs to India. At the outset, not all the deposits result into net accretion. That is because; a good chunk of the deposits are the maturing deposits that have been rolled over under the new scheme or NRE deposits that have been moved into FCNR(B) for its attractive returns. Now for the costs.

The first cost is obviously, the cost of hedging. The current cost is around 3% per annum. Since most of the inflows have come in as 5-year deposits, it will entail a cost of around 15% over 5 years. On FCNR(B) flows of $127.23 billion, that translates into total hedging costs of $19.08 billion, which is a big bill that the RBI has to foot.

The exposure would be fully hedged only if the RBI goes for a 100% cover. Should the RBI go for a partial cover, then there is the price risk that is open. Also, a surge in volatility in the USDINR can result in a surge in the hedging costs. That can also impact the overall costs for the RBI.

Under the RBI swap window, the commercial banks swap the dollars for rupees. In other words, this will result in a rupee liquidity infusion of close to ₹10 trillion to ₹12 trillion. Not only will the RBI have to take up VRRRs to soak the excess liquidity; but a surge in liquidity would also give a boost to inflation. This liquidity glut could suppress yields in the short end and spike yields in the long end of the yield curve.

Finally, there is a cost to the RBI balance sheet. In the last 3 years, the RBI has paid out generous dividends to the government aggregating to ₹7.67 trillion. With a $19 billion hedging cost to be borne by the RBI and the uncertainty associated with the exposure, the RBI is likely to be more conservative about dividends in the next year.

The question is; why is the rupee not appreciating despite the big-bang FCNR(B) flows?

WHY IS THE RUPEE STILL WEAK?

Ironically, despite the inflow of $127 billion via FCNR(B) flows in a span of 3 months, the rupee has continued to be under pressure. There are 2 reasons.

Firstly, the market needs to be convinced that the RBI can actually manage such a huge liability, when it comes up for redemption at the end of 5 years. That is likely to result in substantial bunching of payouts.

The second factor is the huge dollar shorts that the RBI holds in the derivative market. With a spate of rollovers, the dollar shorts stand currently at $137 billion. Markets know that these shorts have to be covered and that is turning into a cap for the rupee.

However, the real benefits of this FCNR(B) surge may be for the RBI in managing the rupee. Post the inflows, the forex reserves are likely to swell closer to $800 billion. That would cover about 12 months of merchandise imports. In a worst-case scenario, the RBI will not have to worry much about expending $100 billion to support the rupee. That comfort zone would really keep the rupee steady. One has to wait and watch!