FCNR(B): Benefits outweigh costs

Source: The post “FCNR(B): Benefits outweigh costs” has been created based on “FCNR(B): Benefits outweigh costs” published in “Business Line” on 11th September 2026.

UPSC Syllabus: GS-3-Economy

Context: The Foreign Currency Non-Resident (FCNR-B) scheme was used by the RBI to attract foreign currency deposits at concessional swap rates and strengthen India’s external position. The concessional swap window operated from June 8 to August 31, 2026, and mobilised $127.2 billion in just 85 days.

Benefits of the FCNR(B) Swap Window

1. Attracted foreign capital at a large scale: The scheme mobilised $127.2 billion, thereby strengthening foreign capital inflows and the balance of payments.
2. Generated a net surplus for RBI: With average forward premia of 2.93% for three-year and 3.23% for five-year tenors, against average US Treasury yields of 4.23% and 4.33%, respectively, investment returns exceeded hedging costs.
3. Created a positive balance-sheet impact: Under the assumed deposit distribution of 40% in three-year, 10% in four-year and 50% in five-year tenors, the estimated hedging cost was $16.3 billion, while investment income was $22.4 billion, generating a net surplus of $6.1 billion (₹58,372 crore).
4. Provided banking-system liquidity: The concessional swaps injected nearly ₹12 trillion of rupee liquidity into the banking system, helping banks overcome elevated credit-deposit (C-D) ratio constraints and supporting productive-sector lending.
5. Reduced government borrowing costs: Surplus liquidity encouraged banks to invest in government securities, pushing yields lower and thereby reducing the government’s borrowing costs.
6. Strengthened external stability: Despite foreign capital inflows of around $136 billion, including FCNR, ECB and OFCB inflows, reserves increased from $681.6 billion to $740.8 billion between June 5 and August 28, indicating the strengthening of India’s forex position.

Costs and Challenges

1. High forward-premium costs: USD/INR forward premia touched more than 1,500 basis points for five-year tenors, raising concerns regarding the cost of the scheme.
2. Surplus liquidity: Durable surplus liquidity reached ₹8.06 lakh crore by mid-August, pushing overnight rates below the repo rate, with call money at 4.95% and TREPS at 4.45%.
3. Sterilisation burden: RBI had to undertake sterilisation operations to keep liquidity within its comfort zone of 0.5–1% of NDTL, creating an additional cost.
4. Temporary liquidity-management challenge: RBI’s short dollar forward position is above $100 billion, with around $40 billion maturing within one year. Their unwinding will automatically contract rupee liquidity.
5. Seasonal liquidity pressures: September and October are likely to witness liquidity absorption due to festive-season withdrawals, advance tax payments, credit growth, revival of capex, government borrowing and import payments ahead of Diwali.

Why the Costs Remain Manageable

1. Even if RBI sterilises liquidity for up to one year, the estimated costs remain manageable.
   1. With surplus liquidity of ₹3–8 trillion and sterilisation rates of 5.3–5.7%, quarterly sterilisation costs could be around ₹3,975–10,600 crore, while annual costs could range from ₹17,000–45,600 crore.
   2. Against the FCNR(B) surplus of ₹58,372 crore, RBI could still retain a net positive balance of approximately ₹12,772–54,397 crore.
2. RBI can manage liquidity through incremental CRR hikes, longer-term VRRRs and OMOs, instead of relying on permanent sterilisation mechanisms such as RBI should use CRR, VRRRs and OMOs flexibly to manage surplus liquidity without imposing excessive sterilisation costs.
3. RBI should gradually unwind its forward dollar positions to absorb excess rupee liquidity in an orderly manner.
4. Future FCNR(B)-type interventions should be undertaken after carefully assessing their costs, returns and impact on liquidity.
5. RBI should coordinate liquidity management with seasonal factors, credit demand, government borrowing and import payments.
   1. Banks should channel surplus liquidity towards productive-sector lending rather than excessive investment in government securities.
6. RBI should maintain adequate forex reserves and exchange-rate stability while avoiding excessive market intervention.
7. Overall, monetary policy should balance external stability, liquidity management and economic growth while keeping sterilisation costs under control the Market Stabilisation Scheme (MSS).

Way Forward

1. RBI should use CRR, VRRRs and OMOs flexibly to manage surplus liquidity without imposing excessive sterilisation costs.
2. RBI should gradually unwind its forward dollar positions to absorb excess rupee liquidity in an orderly manner.
3. Future FCNR(B)-type interventions should be undertaken after carefully assessing their costs, returns and impact on liquidity.
4. RBI should coordinate liquidity management with seasonal factors, credit demand, government borrowing and import payments.
5. Banks should channel surplus liquidity towards productive-sector lending rather than excessive investment in government securities.
6. RBI should maintain adequate forex reserves and exchange-rate stability while avoiding excessive market intervention.
7. Overall, monetary policy should balance external stability, liquidity management and economic growth while keeping sterilisation costs under control.

Conclusion: The FCNR(B) swap window has broadly achieved its objectives of attracting foreign capital, strengthening the balance of payments, providing banking-system liquidity and lowering government borrowing costs. Although forward-premium and sterilisation costs are significant, they are temporary and manageable compared with the estimated surplus and wider macroeconomic benefits. Therefore, the FCNR(B) intervention can be viewed as a net-positive and prudent measure for financial stability, particularly amid global liquidity tightening and volatile capital flows.

Question: The FCNR(B) swap window has been presented as a measure that strengthened India’s external position while creating manageable liquidity and sterilisation costs. Discuss.

Source: Business Line