RBI to let special forex deposit window close on schedule despite strong flows, sees healthy BoP surplus in FY27

Mumbai: Despite strong inflows, the Reserve Bank of India (RBI) has no immediate plans to end or extend its special foreign currency non-resident bank or FCNR(B) deposit scheme before the 30 September deadline, governor Sanjay Malhotra said.

“We have got robust flows as you have mentioned and we do hope to get good healthy flows going forward. But as of now, there is no proposal under consideration to close the scheme prematurely. We will keep you posted on this,” Malhotra said at the post-policy press conference on Wednesday. During the monetary policy announcement, Malhotra also said that the country’s balance of payments (BoP) would see a healthy surplus in the current financial year.

“Capital flow measures undertaken in June have supported inflows. As a result, the balance of payments is expected to register a healthy surplus this year,” Malhotra said while announcing the bi-monthly monetary policy on Wednesday.

The comments indicate that the RBI is comfortable allowing the temporary window to lapse on schedule, signalling confidence that foreign currency inflows have remained strong enough without requiring additional policy support.

In its previous policy on 5 June, RBI had allowed banks to raise fresh and renewed FCNR(B) deposits with maturities of three to five years and swap those dollars with the central bank at a concessional rate. The FCNR scheme allows non-resident Indians (NRIs) to make leveraged and unlevered deposits at Indian banks.

The pace of capital inflows under FCNR(B), external commercial borrowings (ECB) and overseas foreign-currency borrowings has been much stronger than expected. In just 53 days, the country mobilized $40.8 billion, with FCNR(B) deposits accounting for 90% of the total, official data showed.

HSBC, State Bank of India (SBI) and ICICI Bank garnered half of all inflows under RBI's deposit incentive scheme to attract dollars and strengthen the rupee, official data showed. Public sector banks garnered $8.8 billion, private sector banks $10.7 billion, and foreign banks $8.4 billion under the scheme.

“The flows, as I said, have been robust. Even before these measures a very strong and comfortable external position. This further fortifies our external position, Malhotra said, adding that the RBI does not have a target for these flows.

Surplus revised

India’s BoP surplus in FY27 is estimated at $40 billion, revised up from the earlier estimate of $25 billion. The current account deficit (CAD) is estimated at 1.7% of GDP, according to a report by IDFC FIRST Bank dated 3 August.

Over the past two years, the capital surplus has shrunk substantially to 0.4% of GDP in FY25 and 0.1% of GDP in FY26, with a broad-based slowdown in net inflows. As a result, it has become challenging to fund even a low CAD. In FY26, the CAD was just 0.8% of GDP. Despite that, the Indian rupee depreciated by 11% due to weakness in the capital account.

The BoP surplus incorporates the assumption that the RBI allows existing buy-sell swaps to mature, as these will be replaced with long-term swaps done under FCNR(B), ECB and overseas foreign currency borrowings.

Malhotra’s decision to stick to the FCNR(B) deadline aligns with his repeated assertions that the rupee is undervalued and has room to depreciate. Market participants suggest the RBI wants to build up more war chest reserves to defend the currency, despite strong inflows so far.

“The BoP surplus will help stabilize the Indian rupee and allow monetary policy to focus on the domestic growth-inflation outlook. The improved FX reserve buffer will enable the RBI to limit depreciation pressure on the rupee during periods of escalation in geopolitical risks,” the report said, adding that the stronger buffer is critical for managing currency risks for importers and exporters.

The relentless depreciation pressure on the rupee since last year has resulted in increased hedging by importers and reduced hedging by exporters, which adds to dollar demand. More stability in the rupee will promote hedging among exporters, the report said.

Since the special scheme took off on 8 June, the Indian rupee has depreciated by mere 0.7%, compared with 6% depreciation from 1 January to 8 June, Bloomberg data showed. On Wednesday, the rupee ended at 95.08 per US dollar, against 95.38 on Tuesday.

Liquidity dynamics

Separately, the governor also highlighted that while liquidity conditions could improve over the coming weeks on account of the FCNR dollar flows, eventually there could be normalisation in liquidity beyond September as currency in circulation increases and given forward book maturities.

“Therefore, there was no hint towards the need for any durable liquidity-absorption measures as of now. That said, we think that the room for any such measures would be determined by the extent of dollar flows that come in,” HDFC Bank said in a post-policy report on 5 August.

The banking system has maintained an average liquidity surplus of ₹2.40 trillion in recent days. With signs of de-escalation in the West Asia conflict and moderation in crude oil prices, rupee’s volatility has also lessened, limiting the need for the RBI’s continued intervention in the FX market, the report said.

“If signs of de-escalation in the West Asia conflict become durable, we expect USD/INR to shift to a range of 94.50-95.50 over the coming weeks,” it added.