FCNR(B): Why the Benefits Outweighed the Costs

The FCNR(B) scheme has been in focus since the RBI announced the early closure of the window by one month. This has led to speculation about whether the decision was driven by the cost of the scheme or the scale of inflows. Questions have also been raised about its effectiveness in attracting dollar inflows and stabilising the currency. We address these issues in this article.

What is the cost of the scheme and who bears it?

A simple way to assess the cost of the FCNR(B) scheme is to consider the FCNR(B) deposit rate and the dollar hedging cost. Following the announcement, FCNR(B) deposit rates increased across banks as the RBI fully absorbed the hedge cost. To attract dollar inflows, banks raised deposit rates and passed on part of the hedge-cost benefit to NRI depositors.

The cost of dollar borrowings also rose because banks had to raise funds to provide leverage to depositors. Returns on FCNR(B) deposits are enhanced through leverage, with banks lending dollars to NRI depositors, who then earn interest on their own funds and a spread on borrowed dollars. Assuming a representative FCNR(B) deposit rate of 5.5% and an RBI-absorbed hedge cost of 3%, the total cost to the economy is about 8.5%.

Without the scheme, FCNR(B) deposit rates would have been around 3.5%-4%, plus a 3% hedging cost. This implies a net increase in dollar borrowing costs of roughly 1.5%-2%, which represents the additional benefit passed on to NRI depositors. However, a 3.5%-4% return would likely have been insufficient to attract meaningful inflows in an environment of elevated UST yields. Moreover, the all-in cost of dollar borrowings for banks would still have exceeded domestic borrowing costs because banks would have had to bear the hedge expense.

As bank credit has outpaced deposit growth since mid-2025, pressure on funding costs was already visible through elevated money market and bulk deposit rates before the FCNR(B) scheme was introduced. Banks have also benefited because FCNR(B) deposits are relatively cheaper than rupee deposits, given the RBI's absorption of hedge costs and the exemption from CRR and SLR requirements.

Impact on liquidity and domestic borrowing costs

In the absence of the scheme, banking system liquidity would have been significantly tighter because of a large balance of payments (BoP) deficit. Without the swap windows, the 2026-27 BoP deficit could have reached as much as $60 billion. Such a deficit would have drained liquidity from the banking system, as the RBI would have had to sell dollars and absorb rupee liquidity.

Combined with an elevated credit-to-deposit ratio, tighter liquidity conditions would have raised funding costs further. Therefore, evaluating the scheme purely on the basis of higher dollar borrowing costs while ignoring the benefits of lower domestic funding costs would be incomplete.

What is the cost to the RBI?

The RBI's cost is the hedging expense it has absorbed. Assuming cumulative inflows of $70 billion through FCNR(B) and a potential $20 billion through ECB and OFCB windows, the annual cost to the RBI is estimated at $2.4 billion (₹230 billion).

The RBI has fully absorbed hedge costs for FCNR(B) deposits and partially absorbed them for ECBs (for PSUs) and OFCBs. This cost will appear as a revaluation loss on the forward book over the next three to five years, requiring higher provisions and reducing the RBI's dividend to the Government.

However, this is only one side of the equation. A portion of the inflows will be invested in foreign assets such as US Treasuries and earn interest income. The amount available for investment corresponds to the BoP surplus, which is estimated at $40 billion in 2026-27 with the swap windows in place. Consequently, the net annual cost to the RBI is likely to be lower, at around ₹150 billion ($1.6 billion). Given that the RBI generated ₹2.9 trillion ($30 billion) in 2025-26, this is unlikely to materially affect dividend calculations.

Why hasn't the INR appreciated?

Another criticism of the scheme is its lack of visible impact on the INR, which continues to face depreciation pressures. As of August 13, cumulative inflows under the three swap windows stood at $56.8 billion, with over 90% coming through the FCNR(B) window.

The reason the inflows have not directly strengthened the INR is that the dollars are automatically absorbed by the RBI through buy-sell swaps. Dollar inflows can support the currency only if the RBI subsequently sells those dollars in the spot market. RBI intervention has increased since July and has been an important factor behind the INR's stability despite elevated crude oil prices.

The global backdrop is considerably more challenging than when the FCNR(B) scheme was launched in 2013. First, India-US interest rate differentials are much narrower today, reducing the attractiveness of capital inflows. Second, the scope for policy easing among developed market central banks is far more limited because inflation has remained above target for several years. In addition, the large fiscal stimulus deployed during COVID-19 has left government debt levels substantially higher.

Why close the scheme early?

If the cost was manageable and the scheme helped ease funding pressures, improve liquidity conditions and support currency stability, why close it early?

The Governor has already answered this. Dollar inflows were likely to exceed the required amount by a significant margin. Excessive inflows would create two challenges.

First, these are borrowed dollars that must be repaid after three to five years. The resulting redemptions could be sizable, making it important to ensure a strong BoP surplus at the time of maturity.

Second, inflows through the swap window inject rupee liquidity into the banking system. If inflows became excessively large, liquidity management would require durable sterilisation measures rather than relying primarily on VRRR operations, as is currently the case.