Facing currency pressure linked to the conflict in West Asia, the Reserve Bank of India moved to stabilise the rupee as the summer of 2026 approached. Over that three-month span, the Reserve Bank of India's foreign exchange holdings climbed to an all-time high — a development that has itself given rise to a pair of fresh concerns.
Domestic liquidity has been building, with available funds flowing into local markets at a notably higher rate. Foreign currency gathered through a dedicated concessional swap facility — potentially a substantial pool — carries the prospect of redemption demands arriving somewhere between three and five years from now.
A dedicated Reserve Bank of India scheme launched in June to draw in overseas currency deposits collected $127 billion through FCNR(B) accounts — a total that came in well above what policymakers had anticipated. Overseas foreign currency borrowings contributed $5.26 billion and external commercial borrowings added a further $3.89 billion through the end of August, two inflows that formed part of the broader accumulation driving the country's foreign exchange reserves to an all-time high of $785.7 billion by 4 September.
Under such an arrangement, lenders hand over the foreign-currency deposits they have gathered in exchange for rupees sourced directly from the central bank, a process that channels additional rupee funds into the broader banking system. By the opening week of September, excess banking liquidity had climbed to more than Rs 11 lakh crore, a level that led the central bank to intensify its absorption measures.
During the special window, lenders put FCNR(B) deposit returns at 6–7%, a range roughly double the 3–4% yield those accounts would ordinarily attract. When those deposits reach maturity — a window spanning three to five years out — the resulting dollar outflows may land at a moment when both global and domestic conditions have shifted considerably from current levels.
A comparable currency-support mechanism had been deployed by the RBI back in 2013, a period when the rupee faced mounting depreciation pressure following indications from the US Federal Reserve that its bond-purchasing programme might be wound down. Through the FCNR(B) swap window, lenders drew in roughly $26 billion worth of foreign-currency deposits, a haul that placed dollar reserves within reach of the central bank at a time when the nation's external financing environment was under strain.
According to Prasanna Tantri, a finance professor at the Indian School of Business, the FCNR(B) instrument was a rational policy response in 2013, given that the rupee had lost roughly 20% of its value, the current account deficit hovered near 5%, and investor confidence in the economy had weakened considerably. In a statement attributed to him, no foreign exchange pressures were identified as justification for activating the emergency measure on this occasion.
Stripping out the RBI's forward short positions, he argued, would still leave foreign exchange reserves somewhere between $500 billion and $600 billion at the time the window was opened in June — and beyond the rupee potentially reaching 100 against the US dollar, no scenario he could foresee would have produced anything resembling a financial catastrophe. He noted that a conventional tool such as an interest rate adjustment — an approach adopted by several other nations to steady their currencies — would have been available to the RBI as an alternative course of action.
A 100-basis-point climb in borrowing costs was enacted by Bank Indonesia across two consecutive months — May and June of 2026. Abheek Barua, who holds a visiting professorship at Ashoka University and previously served as chief economist at HDFC Bank, pointed out that periodic large inflows can act as a buffer for the rupee, adding that without the FCNR(B) scheme the currency could well have drifted toward the 100 mark; the RBI's special swap window, he noted, helped anchor the exchange rate at a point when external pressure on the currency was building and capital flows were viewed with concern.
The FCNR(B) scheme, unveiled by the RBI that June, took shape against a backdrop of renewed US-Iran hostilities, an upturn in crude oil prices, a widening import bill, and a weakening rupee relative to the US dollar. Overseas portfolio investors offloaded Indian equities at a notable pace during the period, a trend that weighed on the rupee, which touched an all-time low of 96.96 against the US dollar on 20 May.
Deposits gathered by Indian banks — spanning private, government-owned, and foreign institutions — through the special concessional swap arrangement were eligible in any freely convertible currency, among them the US dollar, euro, and British pound, yet the RBI's corresponding rupee swap facility accepted only dollar-denominated transactions. At the point of maturity — typically somewhere between three and five years out — those deposits would allow banks to return to the RBI and swap the rupees back into foreign currencies.
Under the arrangement, hedging costs would be covered by the RBI, a provision designed to raise the appeal of these deposit instruments for banks seeking to attract funds. Under the same framework, banks gathering FCNR(B) deposits gained permission to extend loans against those funds to borrowers based outside the country.
Subscription volume turned out to be robust enough that the RBI closed the special window a full month before its scheduled end, shutting it on 31 August 2026 rather than waiting out the 30 September deadline. Those two facilities — the OFCB window and the ECB window — are each scheduled to stay accessible through the close of December 2026.
Figures tabled before the Lok Sabha on 3 August by the finance ministry pointed to large private-sector banks as the front-runners in attracting FCNR(B) deposits, though overseas lenders accounted for a meaningful share of the total inflows as well. Between early June 2026 and the final days of July, HSBC's FCNR(B) outstanding balance expanded from roughly $120.3 million to $6.26 billion. As of 30 July, the FCNR(B) deposit portfolio held by Standard Chartered Bank carried a total value of $1.86 billion.
Data from CareEdge Ratings show that overseas lenders drew in FCNR(B) deposits by extending leverage ratios ranging from 19 to 29 times, whereas a portion of domestically headquartered private lenders made available ratios in the 12-to-15-times band. Lenders typically extend leverage at a ratio of around nine to one.
The inflow of deposits lent some support to the rupee's exchange rate recovery, while also adding to the country's foreign exchange reserves. Tracking the rupee's movement between those two reference points, the currency climbed past the 94.5 mark against the dollar by the start of September, having stood at 95.74 when June opened. On 17 September, the rupee slipped past the 96-per-dollar threshold during intraday trading, a move that coincided with a fresh upturn in hostilities across West Asia.
Rao, a senior economist and executive director at DBS Bank, noted that the substantial accumulation of foreign reserves had altered how policymakers weigh their options, giving them a meaningful cushion against currency swings, shifts in commodity prices, and fluctuations in global risk appetite — and that the economy was entering a period of heightened uncertainty with considerably more room to manoeuvre than had been available in previous cycles.
According to analysts, an influx of FCNR(B) deposits would ease the rivalry among banks for locally held savings and potentially reduce their reliance on wholesale funding sources that carry steeper costs. What the development does to near-term borrowing costs and the passage of rate decisions through the financial system stands as a live question for the RBI.
Consumer price growth edged up to 4.82% last month from 4.45% in July, marking a third straight period in which the rate has held above the Reserve Bank of India's 4% benchmark. Wholesale price-based inflation registered at 9.92% for August, extending a run of four consecutive months in which the index has hovered near the 10% mark. Below-average monsoon rainfall has analysts watching food prices closely, as any upward movement there, combined with elevated crude oil costs, could add to broader inflationary pressure.
Figures from the April–June quarter — a GDP expansion of 7.8% alongside persistently elevated inflation — have led a portion of economists to argue that the RBI's monetary policy committee ought to consider tightening borrowing costs when it convenes in October. Dhananjay Sinha, CEO and co-head of institutional equities at Systematix Group, argued that holding the repo rate at 5.25% for an extended period sits awkwardly against the prevailing inflation path, pointing to persistently elevated WPI and CPI readings as evidence of mounting unease with negative real rates, and called for the rate to move toward approximately 6.5% to establish a meaningfully positive real rate rather than sustaining the current accommodative stance.
Separately, Pankaj Tantri of ISB noted that the roughly $127 billion of liquidity sitting in the banking system may create difficulties, given that lending opportunities of that scale are not readily available at present. In a recent address, Axis Bank's chief executive Amitabh Chaudhary raised the possibility that a sustained rise in liquidity levels could push lending activity beyond normal bounds.
Excess liquidity in the system would be absorbed over a three-to-four-month period, State Bank of India chairman C.S. Setty indicated. Rajkotia, who holds an associate vice president post at Moody's Ratings, puts the likelihood of banks meaningfully speeding up their lending at low — and, with deposit-backed facilities tied to FCNR(B) set aside, still places credit growth in a 13–15% band, underpinned by domestic demand alongside investment activity.
A decision by the RBI, dated 11 September, outlined plans to withdraw Rs 1 lakh crore from circulation through sovereign bond sales conducted across three separate tranches via the open market. A variable rate reverse repo operation conducted on September 17 drew Rs 2.4 lakh crore out of the banking system and into the central bank's holdings. Rajkotia's view is that VRRR auctions will likely retain their standing as the RBI's preferred tool for pulling surplus liquidity out of the financial system.
RBI Governor Sanjay Malhotra told a television interviewer that roughly half of all deposits carry a five-year tenor, with approximately 42% falling in the three-year-to-under-four-year band, and added that sustained elevated interest rates in developed economies — if driven by geopolitical factors — could place the rupee under pressure. Murthy Nagarajan, who heads fixed income at Tata Asset Management, noted that dollar purchases by the RBI over the next several years could serve to unwind forward liabilities scheduled to mature from 2029 onward.
Channelling funds worth $100 billion into globally tradeable instruments at a 4% yield across a five-year horizon could, in the estimation of Soumya Kanti Ghosh — Finance Commission member and Group Chief Economic Adviser at State Bank of India — generate returns of around $20 billion for the RBI, a figure that would more than cover the $15 billion hedging cost and leave a net addition of roughly $5 billion, equivalent to approximately Rs 50,000 crore, on the central bank's balance sheet. Under the RBI's framework, hedging obligations on the interest portion of FCNR(B) deposits fall to the banks themselves — a gap in coverage that analysts estimate adds roughly 20 basis points to the all-in cost of mobilising such funds.
Three analysts offered varying assessments of how rupee deposit outflows might be handled over time: one noted that near-term currency stability tends to take precedence during periods of market stress, even when longer-term consequences remain a consideration requiring careful management; a Moody's analyst pointed to the 2013 FCNR(B) episode as evidence that large scheduled maturities need not cause substantial market disruption, given that the Reserve Bank of India has several years to prepare; and a DBS Bank analyst proposed that setting aside a portion of existing foreign reserves against these liabilities could help contain any pressure on dollar demand when deposit maturities or debt repayments fall due.
Tantri of ISB observed that FCNR(B) deposits were mobilised in 2013 and the resulting obligations were settled in full by 2016, with no incidents recorded. Forecasting whether any form of geopolitical disruption will take shape before 2030 sits beyond what analysts can reliably project at this point. The question being raised is whether the circumstances at the time were dire enough to justify taking on that level of risk.
