Targets Met, High Costs May Have Prompted RBI To Prematurely Close FCNR B Scheme
SBI Research, in its report Ecowrap, estimated that the cumulative hedging cost could amount to around $ 10.5 billion over five years: Reports
MUMBAI: In an unexpected move, the Reserve Bank of India (RBI) last Friday decided to prematurely close the FCNR (B) scheme by August 31, 2026, one month before the earlier scheduled closure date of September 30, 2026 surprising market participants. This came even as the RBI governor Sanjay Malhotra, a week prior, during the monetary policy press conference on August 5 had mentioned that there was no proposal under consideration for an early closure for the FCNR scheme.
According to experts, strong response to the FCNR (B) deposit scheme and the cost of the swap may have prompted the RBI to prematurely announce closure of the scheme.
Says Madhavi Arora, lead economist at Emkay Global, “Given that Brent crude price has fallen in the range of $80-85 per barrel then the $ 95 per barrel when the scheme was announced in June, there is a possibility that the internal target may have been lowered from the $ 90 billion earlier. So, the current account deficit funding needs could have been assumed to be lower. Total inflows may be around $ 75 billion of which $ 65 billion would be FCNR B deposits.”
Says Anil Bhansali, head treasury at Finrex Trading Advisors, “The RBI may not have expected the flows to be so good. Since good flows have come, their target met, they announced to close the scheme. The other reason was that though it improved the Balance of Payment position
immediately, it created future external liability for the RBI which would have turned them cautious. Also, the scheme comes at a cost, the hedging cost comes to around $ 9-10 billion assuming that most deposits were of 5 years.”
The RBI announced the USD-INR Forex Swap facility covering FCNR(B) deposits, External commercial borrowings (ECBs) and overseas foreign currency borrowings (OFCB) inflows on June 08, 2026 to attract dollar flows and shield the falling rupee. On August 14, the central bank said that the scheme brought $56.8 billion worth of inflows, with FCNR deposits accounting for $52.3 billion. Based on the encouraging response,the deadline for the swap facility was being moved forward to August 31.
Soumya Kanti Ghosh, group chief economic adviser, SBI in his report said, “While there may be valid reasons to justify an early closure, the most likely reason could be that the target for FCNR (B)
mobilization has already been achieved with inflows at $57 billion. And another $25-30 bn could easily flow in the remaining days of August taking the total collections to around $85 billion.”
SBI Research, in its report Ecowrap, estimated that the cumulative hedging cost could amount to around $10.5 billion over five years.
“While this appears sizeable in absolute terms, it needs to be viewed against the scale of India’s foreign-exchange reserves rather than the FCNR(B) corpus alone. With current reserves at around $700 billion and incremental reserve accumulation assumed at roughly $20 billion annually, the five-year cumulative hedging cost of $10.5 billion would amount to only 1.45 per cent of the current reserve stock and around 1.27 per cent of the projected reserve stock. This is minimal,” said
Ghosh.
