RBI FCNR(B) Swap Window: Hedging Costs & Economic Impact

The Reserve Bank of India (RBI) is projected to incur hedging costs of $9-12 billion over five years if Foreign Currency Non-Resident (Bank), or FCNR(B), deposits mobilized under its special swap window reach $70 billion. This estimate is based on economists’ projections of an annual hedging cost between 2.5% and 3.5%.

As of August 13, the RBI had already accumulated $52.3 billion through FCNR(B) deposits, translating to an approximate five-year hedging cost of $6.5-9.1 billion. Total inflows under the RBI’s broader concessional forex facility, including other foreign currency borrowings, amounted to $56.84 billion.

Key Financial Projections

• Projected five-year hedging cost: $9-12 billion if FCNR(B) deposits hit $70 billion.
• Current FCNR(B) deposits (August 13): $52.3 billion.
• Economists’ estimate for deposits by August 31: $70 billion.
• RBI’s balance sheet (March 2026): $963.5 billion.

Economists Madhavi Arora of Emkay Global Financial Services and Gaura Sen Gupta of IDFC FIRST Bank anticipate FCNR(B) inflows will further increase, potentially reaching $70 billion as banks accelerate their mobilization efforts. Despite the substantial potential cost, Madan Sabnavis, chief economist at Bank of Baroda, believes it will not significantly impact the RBI’s balance sheet.

Mechanism of the FCNR(B) Swap Window

The RBI launched this facility in June to encourage banks to raise three-to-five-year foreign currency deposits. The core mechanism involves banks swapping dollars with the central bank, which then absorbs the hedging cost.

• Objective: To provide banks with access to stable, longer-term foreign currency funding.
• Benefit to Banks: Eliminates the cost disadvantage that previously hindered offering competitive FCNR(B) rates.
• Depositor Incentive: Enabled banks to offer substantially higher interest rates, estimated at 6.0-6.6%, to depositors.

Understanding the Economic Impact

Crucially, the gross hedging cost is not equivalent to an outright economic loss for the RBI. The dollars acquired directly contribute to India’s foreign exchange reserves.

These reserves can be invested in interest-bearing foreign assets, such as short-term US Treasuries, generating income that partially offsets the hedging expense. However, the accounting impact might still be visible on the RBI’s books, potentially leading to an interim loss in the central bank’s forward valuation account and requiring additional provisioning.

Accelerated Closure and Scheme Success

The RBI advanced the closure of this special window, announcing that fresh FCNR(B) deposits will only be eligible if mobilized by August 31, one month earlier than the original September 30 deadline. Swaps against eligible deposits can still be availed until September 11.

This early closure underscores the scheme’s rapid success in exceeding initial expectations. The initiative not only augments India’s foreign exchange reserves, which rose to $707 billion by August 7, but also provides banks with access to three-to-five-year foreign currency funding that would otherwise be expensive to secure.

Forward Perspective

The central question remains whether the benefits of these inflows, including the income earned on reserves and funding advantages for banks, adequately justify the risk and cost undertaken by the central bank. This initiative is reminiscent of the 2013 FCNR(B) mobilization, though current economic circumstances differ.