The Reserve Bank of India introduced a special swap facility in June to encourage non‑resident Indians to place money in FCNR(B) deposits, a move aimed at countering rupee pressure from high oil prices and boosting foreign‑exchange reserves. The response exceeded expectations, with Indian banks mobilising more than $127 billion—well above the initial $50 billion target—before the window closed on 31 August 2026.
Under the arrangement, the RBI shields banks from foreign‑exchange risk on the principal of FCNR(B) deposits. The central bank bears the cost of hedging this exposure, estimated by BofA Securities Research to be up to 3 % annually, and recoups roughly $31.2 billion of its foreign‑currency assets by early August 2026, about 55 % of the amount mobilised. RBI may invest the remaining holdings in U.S. securities, where BofA estimates a 4.5‑5 % return that could offset the hedging cost.
However, the RBI’s swap does not cover interest payments, which banks must pay in dollars when the deposits mature. Many banks, especially state‑run and some private lenders, have chosen not to hedge this exposure because it costs about 3 % a year. Instead, they plan to purchase dollars on the spot market when the interest payment is due.
If the rupee weakens, the cost of making an interest payment rises. For example, a $1 million payment would cost ₹9.5 crore if the dollar is ₹95, but would require ₹10 crore if the dollar rises to ₹100. Banks that have hedged are protected, while those that have not will face higher rupee costs.
The FCNR(B) scheme therefore reduces but does not eliminate currency exposure. The RBI absorbs risk on the principal, while banks retain risk on future interest payments, a factor that could add pressure to the rupee if it weakens sharply.
