The RBI’s special USD-INR swap facility has delivered a bigger-than-expected boost to foreign-currency inflows, helping shore up the rupee, replenish forex reserves and inject liquidity into a banking system hungry for deposits. But the success has also opened up a new set of questions around the risks of taking on large dollar liabilities and managing the excess rupee liquidity created by the exercise.
The Reserve Bank of India’s USD-INR forex swap facility covering the Foreign Currency Non-Resident (Bank) deposits that aimed to arrest foreign outflows and contain the rupee fall, hit two birds with a single stone – one, it ensured strong inflows that stablised the domestic currency, and secondly, flushed the banking system with significant liquidity.
Against the expectation of a USD 90-100 billion of inflows, the deposits worth USD 137 billion hit the shores, surprising most. The banks collected USD 127.23 billion in FCNR(B) deposits, while garnering USD 5.26 billion and USD 3.89 billion in Overseas Foreign Currency Borrowings (OFCBs) and External Commercial Borrowings (ECBs), respectively.
The overwhelming response forced the RBI to prematurely shut the window though it allowed the banks to execute the swap for eligible FCNR deposits until September 11. Eligible FCNR(B) deposit are those deposited on or before August 31.
While the measure is temporary, this has been a big sentiment booster for the local economy, with rupee appreciating from a near 97 all-time low to just about 94. The INR recovered by 2.6 per cent in less than three months.
USD-INR swap/FCNR(B)
The scheme was launched on June 8 and under it, the banks entered into a currency swap agreement with the RBI at predetermined terms. The banks get rupee from the banking regulator in exchange of USD collected from the depositors.
The exchange rate risks have been transferred to the RBI for the deposits made between June 8 and August 31, 2026, and will be borne by the banking regulator at maturity.
Under the deposit scheme, Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCIs) can save their foreign earnings in a fixed-term bank account in USD rather than in Indian Rupees.
However, the FCNR (B) facility also permits other currencies include British Pounds (GBP), Euros (EUR), Australian Dollars (AUD), Canadian Dollars (CAD) and Japanese Yen (JPY).
The banks will offer interests in lieu of the deposits that have a term between a minimum of 1 year and maximum of 5 years. The scheme allows full repatriation i.e. the principal and the accrued interest while offering protection to the depositors against exchange rate fluctuations. The interest on deposits is also exempt of the income tax in India.
The FCNR facility has come a full circle since the time it was introduced as FCNR (A) to attract forex, in 1975. The government/RBI took upon itself to bear the FX risk then, only to realize the perils and shifted the onus on to the banks with a new version FCNR (B) in 1993.
Desperate times call for desperate measures
The RBI data showed India’s foreign exchange reserves declining to a more than one-year low of USD 681 billion in May amid global and domestic economic challenges. But the FCNR (B) inflows turned the table as the reserves scaled a new all-time peak of USD 740.80 billion for the week ended August 28, 2026, the data revealed.
Bonanza for banks
The move could not be timelier as banks grapple with the credit-deposit imbalance. Media reports suggest banks now have surplus cash to lend at a time when the demand for fresh credit remains strong. A moneycontrol.com report puts the numbers in excess of a whopping Rs 11 lakh crore.
The bank deposit growth rate shot-up to 15.4 per cent year-on-year as of July 31, 2026 compared to 12.7 per cent as of July 15 and 10 per cent in the corresponding period last year, marking the fastest pace since December 2016, data analytics and credit ratings company CareEdge said in a note. Meanwhile, the bank credit growth strengthened to 19.3 per cent from 17.7 per cent in the previous fortnight and 10.0 per cent in the corresponding period last year.
Though, the near-term credit outlook remains positive, the current elevated growth rate is unlikely to be sustained throughout FY27, the note warned.
Moreover, as global Central Banks turn hawkish and hint at raising interest rates to curb inflation, RBI may also have to absorb excess liquidity from the system via measures like a hike in the Cash Reserve Ratio (CRR).
Between the lines
The deposit scheme is a short-term measure, rather than a panacea for curbing forex outflows or stabilising the rupee. Opening the door to more such windows in the future could, however, bring its own set of risks. One of the more pointed arguments drew a comparison with Sovereign Gold Bonds (SGBs), which were introduced to encourage investors to hold gold in financial form rather than physical metal. A fixed interest of 2.5 per cent a year was offered, along with redemption linked to the prevailing price of gold at maturity. While fresh SGB issuances have since been paused, the comparison highlights a potential risk: if exchange-rate movements work against the government, the cost of repaying both the principal and interest in dollar-linked arrangements could add to the fiscal burden.
The RBI’s previous stance of not targeting a specific level for rupee also drew criticism from certain quarters as a weaker rupee has an inflationary impact.
Since January last year, there has been a telling impact on the world economy as most of 2025 was washed away with tariff related concerns and the trade deal uncertainties. The next big impact has come from the Middle East war, which is ongoing between Iran and Israel, where the US and Gulf countries are having very high stakes.
Foreign outflows and India’s import bills have been a double whammy to the rupee. Oil prices are once again in the red zone, hovering near the USD 100 per barrel mark. The country imports over 80 per cent of its oil requirements and nearly 60 per cent of its LPG needs and is therefore vulnerable to any further escalation.
Moreover, the Consumer Price Index (CPI) that clocked 4.45 per cent in July, rising from 4.38 per cent in June, has continued its upward trajectory for the nineth time in a row.
It will be interesting to see how this plays out and what measures would the RBI take in events of similar large foreign money exodus and rupee declines.