When RBI revives a tool it last used during the 2013 taper tantrum, it’s worth paying attention

NRI
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Last week, RBI announced a special FCNR(B) swap facility for banks. While it didn’t get as much attention as other policy measures, it could end up being one of the most important announcements for India’s forex reserves this year.

https://www.ndtvprofit.com/economy/rbi-dusts-off-taper-tantrum-crisis-playbook-to-attract-dollar-inflows-11594746

Banks can now raise fresh FCNR(B) deposits from NRIs and swap those dollars with RBI under a special facility. The key benefit is that RBI will absorb the hedging cost, which normally makes these deposits expensive for banks.

Why does this matter?

Because banks can now afford to offer much higher interest rates to NRIs holding US dollars.

For NRIs, the proposition is attractive:

• Higher USD returns than before

• No INR depreciation risk since deposits remain in foreign currency

• Interest is tax-free in India

• Principal and interest are fully repatriable

For India, the objective is simple: attract more foreign currency into the banking system.

Every dollar that comes in through FCNR(B) deposits strengthens forex reserves, improves dollar liquidity, and provides an additional buffer against global uncertainty.

This isn’t the first time RBI has used this strategy.

In 2013, during the taper tantrum, a similar FCNR(B) window helped attract over $30 billion in inflows and played a major role in stabilising the rupee.

The current situation is nowhere near as severe. But the fact that RBI has chosen to bring back the same playbook shows the importance it places on strengthening external sector stability before potential global volatility returns.

Most people will look at this as an NRI deposit scheme.

It’s actually a forex reserves strategy.

And if banks start offering significantly higher FCNR(B) rates over the coming weeks, this could become one of the most attractive USD parking options available to NRIs in 2026.

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I thought depositing in dollars seemed too risky for an individual for 3-5 years, but I was clearly wrong. The RBI had to close the FCNR scheme early after a massive surge in inflows $127.2 billion in FCNR(B) deposits is huge! :sweat_smile: People have gone all in maybe too :stuck_out_tongue:

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They are avoiding immediate currency depreciation for confirmed future depreciation. RBI is buying time.

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Absolutely !!

$127 bn via FCNR(B) is a big number.

No question.This is borrowed money with a return date. 3–5 year deposits.

Banks and RBI have dollars now. They will have to give them back later, with interest.

Short term: good for rupee and reserves.
Medium term and long term: the repayment and rollover risk will be the actual story and something to watch-out.

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$127 billion is honestly a crazy response !! But now I’m wondering what happens to the rupee liquidity created against all these dollars.
RBI has pulled in a massive amount of forex, but then comes the question of where all that rupee liquidity goes.

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Not really though. They were offering more than double the interest rate like 7% instead of 3%. They have to pay back interest like 9 billion pa instead of 4 billion pa. That in addition to currency depreciation during the period will definitely strain RBI and the INR later. But that seems to be the plan - when oil or other imports stabilise, they can stabilise the depreciation. It’s a bet that oil will stabilise in 1-3 years.

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I really dont know what our Govt thinks when they do all these, they launched SGB without the backing of the gold. Gold shot up to the top and now government is having a loss in the scheme.

Now, the government has launched a leveraged FCNR scheme offering in USD. Once again, the underlying exposure is not fully backed by actual USD assets, leaving the government exposed to potentially significant currency risk.

Hopefully this doesnt back fire.

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Why would you say that? RBI got the dollars and it is going to hold those dollars.

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Specifically the interest component. (Also RBI will use the dollars - they need it)

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Interest component is really tiny. Beside no RBI does not really need dollars. They alreayd have reserves in excess of 500 billion dollars :slight_smile:
They do use dollars once in a while to curb excess volatility in Rupee but it is not like RBI is spending billions of dollar everyday.

This was a confidence building measure and shore up reserves. But it is not like they are spending all 120 billion dollar today, and then 3 years down the line buy at market rate to repay.

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Few analysts say that there could be around ₹2 lakh crore figure is an estimated potential cost for the RBI, though its not a guaranteed loss.

The inflows helped boost forex reserves and support the rupee, but they also created excess liquidity that the RBI now has to manage. Since the inflows were much higher than expected, the RBI decided to close the scheme early.

Overall, the scheme strengthened India’s forex position, but it also came with significant hedging costs and liquidity risks.

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A simple infographic to understand FCNR

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off course there are risks and costs. When you borrow 120+ billion dollars there has to be a cost :slight_smile:
All I was saying was that it isn’t a naked short position on USD and statement that exposure is not fully backed by USD assets is incorrect :slight_smile:

I see few more analyst saying it might cost less :slight_smile:
As the analysis goes … nobody seems to know

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