Why in News?

• The Reserve Bank of India (RBI) has revived the Foreign Currency Non-Resident (Bank) [FCNR(B)] concessional swap window until September 30, 2026 to attract foreign currency deposits from the Indian diaspora.
• The move aims to strengthen India's foreign exchange reserves, stabilise the rupee amid volatile global financial conditions, and cushion the economy against external shocks.

What’s in Today’s Article?

• FCNR(B) Deposits
• Reasons Behind the RBI Reviving the FCNR(B) Swap Window
• Key Features of the 2026 FCNR(B) Scheme
• Importance of the FCNR(B) Deposits
• Historical Evolution of India's Forex Mobilisation
• Challenges and Risks
• Conclusion

FCNR(B) Deposits:

• FCNR(B) deposits, introduced in 1993, are foreign currency term deposits maintained by Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCIs) with Indian banks.
• Deposits are maintained in designated foreign currencies such as - US Dollar (USD), Pound Sterling (GBP), Euro (EUR), Japanese Yen (JPY), Australian Dollar (AUD), and Canadian Dollar (CAD).
• Both principal and interest remain denominated in foreign currency, insulating depositors from rupee depreciation risk.

Reasons Behind the RBI Reviving the FCNR(B) Swap Window:

• The revival comes amid -
  • Rising geopolitical tensions.
  • Volatile global capital flows.
  • Persistent inflation and uncertain global interest-rate cycles.
  • Depreciation of the rupee (around 12% year-on-year against the US Dollar as of July 22, 2026).
  • Declining Foreign Direct Investment (FDI).
  • Large Foreign Portfolio Investor (FPI) outflows, with withdrawals of ₹2.87 lakh crore (January–early June 2026), exceeding the entire FY2025 outflows.
• The objective is to build forex reserves, reduce external vulnerabilities, stabilise the exchange rate, and enhance confidence in India's macroeconomic fundamentals.

Key Features of the 2026 FCNR(B) Scheme:

• Concessional swap facility:
  • RBI offers banks a concessional foreign exchange swap facility for FCNR(B) deposits with 3–5 year maturities.
  • Banks benefit from significantly lower hedging costs, approximately 3% below prevailing FX swap rates.
• Higher interest rates:
  • Banks can offer attractive returns, for example, large banks around 6%, and smaller/private banks up to 7.1%.
  • These rates exceed returns on relatively risk-free US Treasury securities (4–4.4%), making FCNR(B) deposits more attractive.
• Targeted mobilisation: RBI aims to mobilise USD 50–70 billion.
• Strong initial response:
  • Total foreign currency mobilisation has reached USD 20.72 billion.
  • USD 17.4 billion (84%) has come through FCNR(B) deposits alone, making it the dominant source of inflows.

Importance of the FCNR(B) Deposits:

• Compared to volatile portfolio investments, FCNR(B) deposits -
  • Provide relatively stable medium-term foreign currency resources.
  • Strengthen India's external financing position.
  • Help defend the rupee during periods of market stress.
  • Improve forex reserve adequacy.
  • Reduce dependence on volatile short-term capital flows.
• Reuters also reported that the RBI has used part of these inflows to unwind a portion of its large forex forward book, improving reserve management.

Historical Evolution of India's Forex Mobilisation:

• India has previously relied on diaspora resources during external stress.
• For example,
  • 1998: RIBs (Resurgent India Bonds) instrument raises forex after Pokhran-II sanctions.
  • 2000: India Millennium Deposits (IMDs) strengthens reserves following sanctions and the dot-com slowdown.
  • 2013: FCNR(B) Special Scheme counters the "Taper Tantrum"; and mobilised nearly USD 34 billion.
  • 2026: FCNR(B) revival to build precautionary buffers against geopolitical and financial uncertainty.
• Unlike earlier episodes, the current initiative is preventive rather than crisis-driven. For example, India's external position is considerably stronger than during previous crises -
  • Forex reserves exceed USD 650 billion.
  • No Balance of Payments (BoP) crisis.
  • Investment-grade macroeconomic fundamentals.
  • Strong external sector resilience.
• Therefore, the current mobilisation seeks to create additional buffers rather than address an immediate liquidity crisis.

Challenges and Risks:

• Rising external liabilities: Higher FCNR(B) mobilisation increases India's external debt obligations, requiring prudent management.
• Dependence on remittances:
  • Nearly 50% of India's inward remittances originate from West Asia.
  • Persistent regional instability, labour nationalisation policies, slowing recruitment of expatriates, and oil-price volatility could moderate remittance growth.
• Global competition: Banks in the UAE and other Gulf countries are offering attractive US Dollar deposit rates, making it harder for Indian banks to compete for NRI deposits.
• Elevated global interest rates:
  • If US interest rates remain high, investors may prefer - US Treasury securities, global money market funds, and dollar-denominated bonds.
  • This could reduce the relative attractiveness of FCNR(B) deposits.
• Banking constraints: Many small and mid-sized Indian banks lack overseas branches or a presence in GIFT City, compelling them to collaborate with larger banks to extend FCNR(B) benefits to NRI customers.

Conclusion:

• The FCNR(B) scheme demonstrates India's ability to leverage its large global diaspora as a strategic source of foreign currency.
• While it strengthens forex reserves and enhances exchange-rate stability, sustained success will depend on maintaining competitive returns, managing external liabilities prudently, and navigating global geopolitical and financial uncertainties.
• The initiative reflects a shift from crisis management to precautionary macroeconomic resilience-building.