Archive · 22 Sep 2026
FCNR(B) Inflows Leave RBI Facing Liquidity and Redemption Risks
The RBI allowed banks to attract more foreign money through special deposits called FCNR(B) deposits.
Banks exchanged that foreign money for rupees, which increased the amount of money available in India’s banking system.
This helped support the rupee when it was under pressure.
However, too much money could encourage banks to lend very quickly and might add to inflation.
The RBI is now trying to remove some of this extra money from the system.
The deposits will have to be repaid in foreign currency after three to five years.
That could put pressure on the rupee later if global conditions are difficult.
Experts disagree about whether the short-term benefit was worth the future risks.
The Reserve Bank of India’s special FCNR(B) swap window attracted large foreign-currency deposits and closed on August 31, 2026, a month earlier than planned.
The inflows helped support the rupee and foreign-exchange reserves but pushed banking-system surplus liquidity above ₹11 lakh crore in early September.
The RBI has begun absorbing excess funds through bond sales and variable-rate reverse repo auctions amid concerns about inflation and lending exuberance.
FCNR(B) deposits will mature mainly in three to five years, potentially creating future dollar outflows and pressure on the rupee.
Experts disagree over whether the emergency measure was necessary, with some citing short-term currency stability and others warning of avoidable long-term risks.
- Who
- The Reserve Bank of India, Indian banks, depositors, economists and bankers are involved.
- What
- The RBI introduced a special FCNR(B) swap window that brought in large foreign-currency deposits and created substantial surplus rupee liquidity.
- When
- The window was announced in June 2026 and closed on August 31, 2026; liquidity concerns intensified in September 2026.
- Where
- The measures affect India’s banking system, foreign-exchange market and rupee.
- Why
- The RBI sought to support the rupee and strengthen foreign-exchange reserves amid currency pressure, foreign portfolio outflows, higher crude prices and external uncertainty.
Arguments Supporting the Measure
Arguments Questioning the Measure
Was an emergency intervention necessary?
Arguments Supporting the Measure
Abheek Barua argued that the inflows helped stabilize the rupee during intense pressure and that the currency might otherwise have approached 100 per US dollar.
Arguments Questioning the Measure
Prasanna Tantri said conditions did not resemble the 2013 crisis, because India had substantial reserves and no comparable foreign-exchange emergency; he argued that interest-rate increases could have been considered instead.
Will surplus liquidity help or hurt banks?
Arguments Supporting the Measure
Supporters say the deposits can reduce banks’ need to compete for domestic deposits, lower reliance on expensive wholesale funding and support credit growth. State Bank of India chairman C.S. Setty said liquidity could be absorbed within three to four months.
Arguments Questioning the Measure
Critics warn that excess funds could lead to abnormal or exuberant lending, increase demand and worsen inflation. Axis Bank chief executive Amitabh Chaudhary raised concerns about unusually high lending.
How serious are future redemptions?
Arguments Supporting the Measure
Moody’s Ratings said the RBI has several years to prepare, while DBS Bank suggested earmarking part of foreign reserves against the liabilities could limit future market disruption.
Arguments Questioning the Measure
Other economists warned that three- to five-year maturities could create dollar demand when geopolitical and global interest-rate conditions are unfavorable, putting renewed pressure on the rupee.
- Special window
- The FCNR(B) swap facility was available through August 31, 2026, earlier than the planned September 30 closure.
- Surplus liquidity
- Banking-system surplus liquidity exceeded ₹11 lakh crore in the first week of September.
- Deposit rates
- Banks offered roughly 6–7% on FCNR(B) deposits, compared with typical rates of 3–4%.
- Deposit maturity
- The deposits will mature in three to five years; nearly half reportedly have five-year tenors and about 42% have three- to- less-than-four-year tenors.
- Liquidity absorption
- The RBI announced ₹1 lakh crore of sovereign bond sales and absorbed another ₹2.4 lakh crore through variable-rate reverse repo auctions.
- Rupee movement
- The rupee recovered to above 94.5 per US dollar by early September but later breached 96 intraday on September 17.
- Inflation and growth
- August retail inflation was 4.82%, wholesale inflation was 9.92%, and April–June GDP growth was 7.8%.