Introduction
The Indian rupee has been under pressure for a considerable period, but in 2026 its depreciation has become significantly sharper. The rupee has already depreciated by around 9% in 2026, compared with an average annual depreciation of approximately 3% over the 30-year period from 1995 to 2025.
A sharp fall in the value of the rupee can create several challenges for the Indian economy. It can make imports more expensive, increase inflationary pressure, and create additional challenges for economic growth.
Naturally, this has become an important concern for the Government of India, Indian banks and, most importantly, the Reserve Bank of India (RBI).
The RBI has therefore taken several measures to stabilize the rupee and strengthen India’s foreign exchange position. One such measure that attracted significant attention was the special facility linked to FCNR(B) deposits for Non-Resident Indians (NRIs).
The facility was initially announced on 8 June 2026, with deposits permitted under the special window until 30 September 2026. However, on 14 August 2026, the RBI announced that the deadline would be brought forward to 31 August 2026.
This decision came after the facility had reportedly attracted approximately $52.3 billion in inflows between 8 June and 13 August 2026.
This raises an important question:
Why would the RBI close a scheme early when it had successfully attracted more than $52 billion into India?
To understand this, we first need to understand what FCNR(B) deposits are, why the RBI introduced the special swap facility, how it benefited banks and NRIs, and why the RBI eventually decided to end the special arrangement earlier than originally planned.
What Is an FCNR(B) Deposit?
FCNR(B) stands for Foreign Currency Non-Resident (Bank) Deposit.
In simple terms, an FCNR(B) deposit is similar to a fixed deposit for an NRI, except that the deposit is maintained in a foreign currency rather than Indian rupees.
For example, suppose an NRI living in the United States has US$100,000.
Instead of converting the dollars into Indian rupees and investing the money in an NRE or NRO deposit, the NRI can place the money in an FCNR(B) deposit denominated in US dollars.
The important feature is that the principal remains denominated in dollars.
Suppose the exchange rate is:
US$1 = ₹90
and after several years it becomes:
US$1 = ₹96
The NRI does not suffer a direct loss on the FCNR(B) principal due to the rupee’s depreciation because the deposit continues to be denominated in US dollars.
The NRI receives the dollar principal along with the interest earned in dollars.
This makes FCNR(B) deposits particularly attractive to NRIs who want to earn interest while keeping their savings protected from direct rupee depreciation. Under the RBI framework, FCNR(B) deposits can be maintained in designated foreign currencies and can have a maturity period of up to five years
What Changed in June 2026?
The concept of FCNR(B) deposits itself was not new.
What changed in June 2026 was the special arrangement introduced by the RBI to encourage banks to offer significantly higher interest rates on new FCNR(B) deposits.
Previously, FCNR(B) deposit rates were around 3% in the example considered here.
Under the new arrangement, banks were able to offer interest rates of more than 6%.
At first glance, this raises an obvious question:
How could banks afford to pay NRIs more than 6% when they still had to manage the foreign-exchange risk?
The answer lies in the special US dollar–Indian rupee swap facility introduced by the RBI.
To understand this, let us look at a simplified example.
How FCNR(B) Deposits Worked Earlier
Suppose an NRI deposits:
US$100,000
with an Indian bank for five years.
The bank promises to pay the NRI approximately 3% annual interest.
But the bank cannot simply keep the dollars idle.
Typically, the bank would convert the foreign currency into Indian rupees and use the funds for lending or other permitted activities.
Suppose the bank lends the equivalent rupee amount to Indian businesses or individuals at:
8% per annum
So the bank earns approximately 8% on its lending while paying approximately 3% to the NRI.
At first glance, this appears to give the bank a:
8% − 3% = 5% spread
However, there is an important additional risk.
The Foreign Exchange Risk
The bank ultimately has to return US$100,000 to the NRI at maturity.
Suppose today’s exchange rate is:
US$1 = ₹90
The bank converts the dollars into rupees and lends those rupees in India.
But five years later, the rupee may have depreciated.
For example, suppose the exchange rate becomes:
US$1 = ₹104
The bank will now need significantly more rupees to obtain the US$100,000 required to repay the NRI.
Therefore, the bank faces foreign-exchange risk.
To protect itself, the bank can hedge this currency exposure through the foreign-exchange market.
In our simplified example, assume that the cost of this hedge is approximately 3% per year.
The bank’s economics would then look roughly like this:
- Lending income: 8%
- Interest paid to NRI: 3%
- Hedging cost: 3%
- Approximate remaining spread: 2%
Therefore, the bank’s net interest margin from this transaction could be approximately 2% before other operating costs. This explains why banks had limited room to offer substantially higher interest rates on FCNR(B) deposits.
What Changed After the RBI’s Special Facility?
Now consider the situation after the RBI introduced the special swap facility.
Banks could offer NRIs an interest rate of around 6% or more on qualifying FCNR(B) deposits.
Suppose the bank receives:
US$100,000
and promises the NRI:
6% annual interest
The bank can still lend the corresponding rupee funds at approximately:
8%
At first glance:
8% − 6% = 2%
So where does the bank get the additional room to pay the NRI 6%?
This is where the RBI’s special swap arrangement becomes important.
Under the special arrangement, the RBI effectively took on the relevant foreign-exchange risk for the participating banks through the swap mechanism.
In simplified terms, the bank did not have to bear the same hedging cost that it would normally incur in the market.
Therefore, the economics could look like this:
8% lending income − 6% interest paid to NRI = approximately 2% spread
The key difference is that the bank’s normal currency-hedging cost was substantially reduced or removed under the special arrangement.
Why Were Banks Interested in the Scheme?
The special facility offered banks several important advantages.
1. No CRR and SLR Requirement on These Deposits
One major advantage was the regulatory treatment of these incremental FCNR(B) deposits during the special window.
Banks generally have to maintain certain proportions of their deposits as Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
For example, if a bank receives ₹100 in deposits, it cannot necessarily use the entire ₹100 for lending.
A portion has to be maintained according to regulatory requirements.
Under the special treatment for these FCNR(B) deposits, the incremental funds were exempted from the applicable CRR and SLR requirements.
This meant that banks could deploy a greater proportion of the funds for lending.
That could improve the economics of the deposits for participating banks.
2. Banks Could Improve Their Deposit Position
Indian banks have been competing aggressively to attract deposits.
When banks receive FCNR(B) deposits through this special facility, they obtain additional funding in foreign currency.
This can help banks strengthen their overall funding position and potentially improve their credit-deposit ratio and lending capacity.
In simple terms:
More deposits → more funds available for lending → potentially stronger banking activity
This was particularly useful at a time when banks were looking for additional sources of deposits.
3. Access to Foreign Currency Funding
The facility also helped banks obtain additional foreign-currency resources.
This was important because India needs foreign currency to meet its external payment requirements, including payments for imports and other international obligations.
Therefore, the facility was not simply about providing higher returns to NRIs.
It was also part of a broader strategy to improve India’s foreign-exchange liquidity.
Why Would the RBI Bear the Currency Risk?
This is one of the most important questions.
If the RBI is taking on the currency risk through the swap facility, it potentially exposes itself to losses if the rupee depreciates significantly.
For example, if the rupee weakens much more than expected, the RBI could face a financial cost under the swap arrangement.
That could ultimately affect the RBI’s profits.
The RBI transfers a significant portion of its surplus to the Government of India.
Therefore, if the RBI’s profitability is affected by losses or costs associated with such operations, there could potentially be an impact on the surplus available for transfer to the government.
However, the RBI’s objective is not simply to maximize its own profit.
Its primary responsibility is to maintain monetary and financial stability and manage the country’s foreign-exchange position.
Why Did the RBI Want More Dollars?
The answer is relatively straightforward.
When the rupee is under pressure, attracting additional foreign currency into India can strengthen the country’s external position.
The FCNR(B) facility helped attract foreign-currency deposits from NRIs into Indian banks.
The additional foreign-currency liquidity can help India meet its external payment requirements and improve confidence in the country’s foreign-exchange position.
In simplified terms:
More foreign currency inflows → stronger forex liquidity → greater ability to meet external obligations
It can also help reduce pressure on the rupee during periods of significant depreciation.
The Big Question: Why Did the RBI End the Facility Early?
This is perhaps the most interesting part of the entire story.
The RBI initially permitted the special mobilization of FCNR(B) deposits until:
30 September 2026
But on 14 August 2026, the RBI brought the deadline forward to:
31 August 2026
Why?
One possible explanation is that the facility had already achieved its objective much faster than expected.
Between 8 June and 13 August 2026, the facility reportedly attracted approximately:
US$52.3 billion
That is a substantial amount of foreign-currency inflow.
Once the RBI had accumulated a significant amount of additional foreign-exchange liquidity, it may have concluded that there was no longer a strong need to continue offering the special incentive for another month.
Could Too Many Dollar Inflows Become a Problem?
Interestingly, yes.
While attracting dollars can help when the rupee is under pressure, excessively large foreign-currency inflows can create the opposite problem.
When large amounts of dollars enter the Indian financial system, the supply of dollars increases.
If demand for dollars does not increase proportionately, the rupee can come under appreciation pressure.
For example:
Higher dollar supply → relatively lower demand for dollars → potential appreciation pressure on the rupee
A stronger rupee has some advantages.
It can make imports cheaper and reduce imported inflation.
However, there can also be disadvantages.
A significantly stronger rupee can make Indian goods and services relatively more expensive for international buyers.
This can affect India’s export competitiveness.
Therefore, the RBI has to maintain a balance.
The RBI’s Balancing Act
The FCNR(B) facility illustrates an important principle of central-bank policy.
The objective is not necessarily to make the rupee as strong as possible.
The objective is to maintain stability.
When the rupee is depreciating sharply, the RBI may want to encourage foreign-currency inflows and strengthen India’s external position.
But if foreign-currency inflows become excessively large, the RBI may also need to consider the possibility of excessive appreciation pressure on the rupee.
Therefore, the RBI has to balance several factors:
- Exchange-rate stability
- Foreign-exchange reserves and liquidity
- Inflation
- Import costs
- Export competitiveness
- Banking-system liquidity
- Financial stability
- The potential cost of currency interventions
Conclusion
The special FCNR(B) facility introduced in June 2026 was an important measure aimed at attracting foreign-currency deposits from NRIs at a time when the Indian rupee was under significant pressure.
The key attraction for NRIs was the possibility of earning higher interest in a foreign currency, while avoiding direct exposure to rupee depreciation on the principal.
For banks, the arrangement offered additional deposits, favorable regulatory treatment and reduced currency-hedging costs.
For the RBI, the facility helped attract substantial foreign-currency inflows and strengthen India’s external liquidity.
However, monetary policy is always about finding the right balance.
Once the facility had attracted approximately US$52.3 billion in a relatively short period, the RBI may have considered the objective substantially achieved. Continuing the special incentive for longer could potentially have generated unnecessarily large foreign-currency inflows and additional appreciation pressure on the rupee.
Therefore, the early closure of the facility should not necessarily be interpreted as a failure.
Instead, it can be viewed as an example of the RBI adjusting its policy once the desired objective had been achieved.
The Bigger Lesson
The FCNR(B) episode demonstrates how interconnected the Indian economy is with global capital flows.
A single policy measure can simultaneously affect:
NRIs → Banks → Foreign-exchange markets → Rupee → Inflation → Imports → Exports → RBI → Government finances
Understanding this chain is essential to understanding how the RBI manages India’s currency and financial stability.