The Reserve Bank of India (RBI) has announced that it will shut down its discounted foreign exchange deposit swap facility tied to Foreign Currency Non-Resident (Bank) or FCNR(B) deposits a month earlier than planned. Moving swiftly to cap further liabilities, the central bank said the facility will now accept fresh FCNR(B) deposits only up to August 31, 2026. Swaps under the facility must be executed by September 11. Previously, both deadlines were set for September 30.
### Robust Inflows Prompting Early Wind-Down
Since the scheme was launched on June 8, 2026, inflows have surged past $52.3 billion in FCNR(B) deposits by August 13. Combined with Overseas Foreign Currency Borrowings (OFCBs) and External Commercial Borrowings (ECBs), total foreign exchange inflows under the facility hit approximately $56.85 billion.
As foreign-exchange reserves climbed, the RBI judged that it had met its balance-sheet requirements well ahead of schedule. From the week ending July 3, reserves have swelled by more than $40 billion. The week ending August 7 saw the highest weekly jump since late January, with reserves rising by $14.14 billion to reach $707 billion—largely driven by a $9.9 billion spike in foreign-currency assets.
### RBI Governor’s Earlier Assurances
Governor Sanjay Malhotra had reassured markets on August 5 that there was no intent to end the facility ahead of its planned September deadline. He noted strong inflows but said no early closure had been decided at that time.
### Why the Facility Is Closing Early
Analysts say the early closure stems from inflows accelerating faster than anticipated. With reserves growing sharply, the RBI appears confident it can meet foreign exchange and balance sheet obligations without further foreign liabilities. “Once the target has been achieved earlier than anticipated, there is little point in raising more money than is required and keeping those liabilities on the books,” Madhavi Arora, chief economist at Emkay Global Financial Services, explained.
Madan Sabnavis, chief economist at Bank of Baroda, added that the central bank likely considers the current stock of foreign currency sufficient, though the surplus could contribute to liquidity build-up in the system.
### Key Details of the FCNR(B) Swap Scheme
– The swap facility permits banks to mobilise FCNR(B) deposits with tenors of three to five years.
– Under the scheme, banks swap the incoming foreign currency with the RBI at the prevailing spot rate.
– The RBI absorbs the entire hedging cost, enabling banks to offer competitive interest rates to depositors.
### Timeline: Announcement to Closure
– **June 5, 2026** – RBI announces the new swap facility.
– **June 8** – Facility becomes operational.
– **August 5** – Governor states early closure is not under consideration.
– **August 13** – FCNR(B) deposit inflows reach about $52.3 billion. Total under the facility hits $56.85 billion when including OFCBs and ECBs.
– **August 14** – RBI confirms facility will close on August 31 for deposit mobilisation. Swaps must be utilised by September 11.
### Implications for Banks and Depositors
Banks now face a compressed timeline to grow FCNR(B) deposits. They must ensure all new inflows are ready before the August 31 deadline. Similarly, depositors eyeing favourable rates under this scheme need to act fast. Post-deadline, fresh FCNR(B) deposits under this scheme will no longer be eligible—though swaps remain available till September 11.
### Context: Reserves, Volatility, and Market Response
Forex reserves peaked at $728.49 billion in late February 2026 before easing due to RBI interventions aimed at curbing excessive rupee volatility. Gradually, sustained foreign exchange inflows led the RBI to resume dollar purchases, helping restore reserves to their strongest levels since the week ending March 13.
While inflows have surged from various channels, the FCNR(B) facility stands out for its scale and speed. The RBI introduced similar measures in parts of August and September 2013 with expected upticks in deposits, but this time around, signals such as early clarity on leverage issues helped spur capital flows starting July.
### Governor’s View and Forward Outlook
Governor Malhotra’s remarks on August 5 reflected optimism: “We have got robust flows… And we do hope to get good, healthy flows, going forward.” Despite that, the absence of a closure proposal then contrasted sharply with the RBI’s decision just over a week later.
Looking ahead, other components of the scheme—namely ECBs and OFCBs—remain active until December 31, 2026. They are unaffected by this early wind-down.
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