A foreign-currency deposit is not a permanent addition to India’s reserves. It is a promise to return the principal and interest three to five years later. When the Reserve Bank of India swaps those dollars for rupees, it assumes a dated obligation to deliver dollars back to the bank. RBI receives foreign currency today, but also creates a future foreign-currency outflow.
For RBI, that is where the risk begins. RBI can create rupees; it cannot create dollars. If the assets backing the swaps do not mature in the right currency, amount and sequence, it must draw down reserves, borrow abroad or buy dollars in the market, possibly when external conditions are already difficult.
India’s three large diaspora-funding episodes show an improving understanding of this risk. The 1998 Resurgent India Bonds raised about $4.2 billion through a single five-year tenor, leaving principal and accumulated interest to fall due together in 2003. The 2013 FCNR(B) window raised roughly $34 billion, but its three-year minimum tenor produced a less concentrated maturity profile. The 2026 scheme went further, accepting three-to-five-year deposits with a one-year lock-in. As per press reports, FCNR(B) collections crossed $100 billion by August 31.
The maturity design has improved. The obligation has also become much larger.
Nor is the funding free. RBI gives up the forward premium that allows banks to offer unusually high deposit rates, absorbs currency and interest-rate risk, and bears the cost of sterilising the rupees released into the banking system. CRR and SLR exemptions also reduce the buffers normally attached to deposit mobilisation.
The structure creates a moral hazard. Banks can compete aggressively because RBI carries the hedge, while depositors receive high returns with sovereign-like comfort. A short mobilisation window and pressure to process inflows quickly can also weaken beneficial-ownership checks, raising the risk that questionable rupee funds are routed offshore and returned as apparently legitimate foreign-currency deposits. The answer is not to reject the instrument, but to tighten verification precisely when its incentives are most generous.
The treasury task is therefore immunisation, not return maximisation. RBI must build the asset book backwards from the liability. Dollar assets should be ring-fenced against each maturity tranche; portfolio duration should match the duration of the swap book; and cash flows should arrive when each obligation falls due. An average duration match is not enough if the dollars arrive on the wrong dates.
Rollover only postpones and reprices the exposure. Netting against RBI’s forward book helps where amounts and maturities coincide. Neither substitutes for matching the underlying liability.
There is also an immediate rupee-side consequence. The swaps inject liquidity now, while the dollar obligation falls due years later. Sterilisation can contain the monetary impact, but imposes a carrying cost and complicates liquidity management long before the foreign-currency liability matures.
A commercial bank that mismanages such a book can borrow, be recapitalised or be resolved. RBI is the backstop. A mismatch on its balance sheet reaches the sovereign reserve position and the credibility of the currency. Gross reserves may look ample, but a stock of reserves is not the same as a schedule of dollars available on the dates they are owed.
That is why the 2026 scheme cannot be judged by the inflow alone. The real test begins when the dollars come due. RBI must ensure that repayment does not depend on a favourable rupee, benign global rates or easy market access. The book must be built so that the forecast does not have to be right.
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