RBI Closes FCNR(B) Scheme Early: What You Need to Know

The Reserve Bank of India (RBI) has prematurely closed its Foreign Currency Non-Resident (Bank) (FCNR(B)) deposit mobilisation scheme. This decision, announced on August 14, advanced the concessional swap facility deadline from October 16 to September 11, 2026, after the scheme collected $52.3 billion.

The move surprised bankers and market participants, especially following RBI Governor Sanjay Malhotra’s earlier statement indicating no proposal for an early end. Malhotra later clarified the decision as a “calibration,” underscoring the central bank’s commitment to flexibility and data-driven policy in dynamic economic conditions.

Understanding the FCNR(B) Mechanism

The FCNR(B) deposit scheme enabled Non-Resident Indians (NRIs) to place foreign currency into fixed accounts for periods ranging from three to five years. Both the principal and interest from these deposits were fully repatriable.

A critical component was the special hedging facility, where the RBI absorbed an estimated 2-3% of the cost. This allowed banks to offer attractive returns to depositors, typically between 5.5% and 7.1%.

The operational mechanism involved banks selling dollars to the RBI under a swap arrangement, receiving equivalent rupees in return. This process effectively supplied the central bank with foreign currency, enhancing its capacity to intervene in markets if the rupee faced depreciation pressure.

Strategic Closure Amidst Repayment Costs

Experts view the early closure as a prudent financial decision. An economist highlighted that if the scheme had continued to raise $65 billion, the repayment obligation after five years, compounded at a 6.5% interest rate, would have reached an estimated $88 billion.

Prolonging the scheme would have indeed mobilised more capital but at a significantly higher future repayment cost. Concerns regarding global economic headwinds, the long-term sustainability of foreign capital flows, and the potential for excess liquidity within the financial system also influenced the RBI’s decision-making process.

India’s Stronger Position in Global Economy

Unlike the external vulnerabilities India faced during the 2013 ‘taper tantrum,’ the country is projected to be in a much stronger position by 2026. India’s foreign exchange reserves now exceed $707 billion, accompanied by a manageable current account deficit and robust banking fundamentals.

Analysts at IIFL Capital supported the RBI’s action, noting that the central bank likely achieved its objective of accumulating foreign currency sooner than anticipated. This strategic closure helped avoid unnecessary future liabilities and complex liquidity management requirements, as excessive liquidity can complicate monetary policy objectives.

Ultimately, the premature closure of the FCNR(B) scheme is considered a well-considered and calibrated decision. While the market communication could have been more direct, the underlying rationale aligns with maintaining economic stability and managing future financial obligations efficiently.