Last week, the Reserve Bank of India (RBI) declared that its special forex swap facility for Foreign Currency Non-Resident (FCNR-B) deposits with banks would close on 31 August, a month ahead of schedule.
This news came within days of RBI governor Sanjay Malhotra saying there was “no proposal under consideration to close the scheme prematurely” at a post-policy press conference.
Presumably, this change of mind was driven by a change in facts: in particular, the robust response from overseas Indians—with $52.3 billion drawn already, banks can expect more dollar deposits by month-end—and finds justification in the governor’s qualifying remark that RBI had no specific target.
Going by the numbers, the decision to call an early end to the zero-cost hedge for banks against forex flux suggests it has been a big success. After all, it was only a little over a month ago that finance minister Nirmala Sitharaman exhorted banks to come up with “innovative deposit products” to tap that money.
It was expected to be a redux of 2013, when a similar RBI package in response to that year’s taper tantrum helped stabilize the rupee’s exchange rate. And so it was.
This time, the Indian currency gained nearly 2% against the dollar after a raft of measures was put in place (there were other forex lures too), but has returned to the 95-96 range. India’s forex reserves, though, swelled to $707 billion on 7 August 2026 from $672 billion on 12 June.
The central bank has apparently not needed to expend all that much on rupee defence. But the situation today, both domestic and global, is vastly different too. What must be borne in mind is that like all quick fixes, India’s ‘success’ with dollar deposits has come at a price.
Apart from smacking of panic and resulting in a sharp liquidity increase, there is the issue of hedging costs to be borne by RBI. Since these FCNR-B deposit tenures range from 3 to 5 years, it will be a long time before we get an assessment of the latter, if at all.
Should the rupee slide significantly over that period, the swap facility would turn out costly for RBI. A sharp rise in bank deposits over the past few weeks, meanwhile, could add to inflationary pressures right away.
All of this could plausibly explain why a call was taken not to rake in too much.
A bigger dilemma over such stop-gap measures, however, arises from the fact that they address only a symptom—rupee weakness—instead of the underlying cause, a basic macro imbalance visible in a worsening current account deficit (CAD).
An excess of consumption over domestic savings is not a problem in itself, so long as it is financed by capital inflows. In the first quarter of 2026-27, it was feared that India’s $3.1 billion CAD would keep getting worse as oil prices surged along with asset portfolio outflows, and that it would push the currency further down. Especially since our balance of payments had also been worsening over the past few years. Those fears seem to have receded to an extent in Indian policy circles since.
Even so, geopolitical uncertainty is far from over. And while the FCNR-B deposit scheme succeeded in spite of a narrow gap between Indian and US interest rates, thanks partly to leverage deals on offer, India’s policy focus must stay firmly on long-term macro sustainability.
The country must mount a defence on two major fronts: reduce its CAD, letting prices restrain consumption, and attract far greater capital inflows. The less we resort to quick fixes whose bills must be paid later, the better.