FCNR (B) haul soars to $127 bn on final sprint exceeding mkt expectations

Inflows through the Reserve Bank of India’s (RBI’s) concessional swap facility reached $136.4 billion by August 31, with banks mobilising $127.2 billion in foreign currency non-resident (bank), or FCNR(B), deposits — far exceeding late market expectations of $90-100 billion, data released on Wednesday showed. 

The FCNR(B) window closed on August 31, while facilities for external commercial borrowings (ECBs) and overseas foreign currency borrowings (OFCBs) will remain open until December 31, 2026. Banks have so far raised $5.3 billion through OFCBs and $3.9 billion through ECBs. 

FCNR(B) mobilisation accelerated sharply in the final week before the deadline, rising from $65.4 billion on August 21. The deposits raised under the scheme have maturities of between three and five years, with most of the inflows coming in the five-year category. 

 

“It was beyond anyone’s expectation. It shows the confidence of the global financial system in India, because ultimately money has to come to this country,” said the chief executive officer (CEO) of a large bank. 

The RBI operationalised the concessional swap facility for fresh FCNR(B) deposits, OFCB and ECB inflows on June 8. The initial deadline for the FCNR(B) window was September 30, 2026, but the central bank brought it forward by a month after receiving a strong response. 

ICICI Bank, the country’s second-largest private sector lender, said it had mobilised $17.9 billion in FCNR(B) deposits through the scheme.

 State Bank of India, the country’s largest lender, has also exceeded its $10 billion target for FCNR(B) mobilisation, according to people familiar with the matter.

 

The funds are already finding their way into lending. Public sector banks have disbursed $52.8 billion in loans through their International Financial Services Centre (IFSC) banking units at GIFT City, against sanctioned loans of $54.02 billion, according to a press release from the International Financial Services Centres Authority (IFSCA).

 

ECBs disbursed by IFSC banking units totalled $11.62 billion between April and August, while Indian banks raised $11.12 billion through bond issuances on IFSC exchanges during the period, the IFSCA said.

Liquidity challenge

 

The success of the FCNR(B) window, however, creates a sizeable liquidity-management challenge for the RBI. Core liquidity in the banking system had risen to more than ₹8 trillion by August 15 and could exceed ₹10 trillion in September.

 

With the liquidity impact of the inflows substantially larger than anticipated, the RBI is likely to deploy durable liquidity-absorption measures to contain the surplus. The liquidity surge also comes as consumer price inflation is beginning to edge higher.

 

“There will be a cost of sterilising this liquidity; the question is who will bear the cost,” said a market participant. “If incremental cash reserve ratio is implemented then the cost is borne by the banks,” the person added.

 

Market participants also estimate a potential fiscal cost. The deposits represent a future dollar-denominated liability, while the cost of managing the resulting liquidity could reduce the RBI’s surplus transfer to the government. The cumulative indirect fiscal cost could exceed ₹1 trillion.

 

“It is important to recognise that this represents a future dollar-denominated debt liability, with an indirect fiscal cost through lower RBI dividends, potentially amounting to ₹1 trillion-plus cumulatively. The funds raised therefore need to be deployed judiciously and productively to mitigate these first-order costs,” said Madhavi Arora, chief economist at Emkay Global Financial Services.

 

Dollars move into RBI’s forward book

 

The impact of the swap facility is also becoming visible in the RBI’s foreign exchange forward positions. The central bank’s net short dollar position in the forward market rose to a record $136.77 billion at the end of July, from $103.33 billion at the end of June, driven largely by longer-tenor contracts.

 

Short positions with maturities of more than one year rose to $91.54 billion from $64.21 billion over the same period.

 

Market participants said the increase suggests that the RBI has been more active in the forward market amid depreciation pressure on the rupee, rather than allowing existing positions to mature and adding to pressure on the currency.

 

A large proportion of the dollars raised through the FCNR(B) swap facility is borrowed and will have to be returned over the next three to five years. The RBI is therefore likely to limit the use of spot intervention and deploy the dollars through the forward market instead, they said.

 

The scale of the inflows could also intensify competition among banks for high-quality borrowers. “Given the magnitude of these inflows, its profitable deployment is likely to take some time and could intensify competition for quality borrowers. Meanwhile, the near-term impact could be lower loan yields and some moderation in margins,” said Sachin Sachdeva, vice-president and co-group head, financial sector ratings, at ICRA.