The Reserve Bank of India’s (RBI) special window, which offers high tax-free returns on dollar bank deposits of non-resident Indians may close well before the scheduled deadline of September 30, as robust inflows have started raising concerns about “reversal risks,” official sources told FE.
“Nobody expected this volume of inflows in such a short time,” one of the sources said, adding that inflows under the special Foreign Currency Non-Resident (Bank) window might touch $50 billion this week. The sources indicated that the government and the RBI may discuss closing the window once inflows reach around $50 billion.
The scale of the response has shifted the policy debate from whether the scheme would work to how soon it should be switched off, they added.
The government and RBI, however, would retain the option to reopen such schemes if external shocks exert fresh pressure on the rupee, the sources said. The concern is that the chances of much higher inflows if the window is kept open for another 40 days could potentially result in foreign currency liabilities stocks that are difficult to manage as these deposits mature.
According to official data, between June 23, when inflows started trickling in, and August 6, FCNR(B) deposits accounted for $42.78 billion of the $47 billion mobilised through the new swap facility, with another $1.5 billion coming through external commercial borrowings (ECBs) and $2.8 billion through overseas foreign-currency borrowings (OFCBs).
The RBI’s June 5 package was designed to make FCNR(B) deposits more attractive by removing interest-rate caps on fresh FCNR(B) and NRE deposits until September 30 and offered banks a special three-to-five-year swap facility under which the central bank bears the full hedging cost. The facility also covers eligible inflows from ECB and OFCB.
Banks subsequently raised FCNR(B) deposit rates sharply, making the deposits more competitive for overseas investors despite high dollar rates overseas. As a result, dollar inflows surged despite oil-price volatility and geopolitical risks in West Asia.
India’s foreign exchange reserves increased by $10.51 billion to $692.87 billion in the week ended July 31, marking the highest weekly gain since January 30, driven by a rise in foreign currency assets and gold reserves.
But the very success of the scheme is now reviving memories of 2013, when a similar FCNR(B) drive yielded around $26 billion to shore up the rupee during a period of intense market stress. The eventual maturity of those deposits created another foreign-exchange management challenge. The RBI handled the situation through planned forward purchases and other market operations, cushioning the impact of the outflows on the rupee and forex reserves.
The RBI’s current swap window applies to FCNR (B) deposits of tenures 3 years and 5 years booked or renewed between June 8 and September 30, 2026. The scheme doesn’t allow premature withdrawal of deposits in the first year.