FCNR(B) Inflows Hit $127 Billion: RBI Solved a Dollar Problem, but Created a Rupee Liquidity Problem

Written by Finnovate

Content Team

India wanted more dollars.

It got far more than expected.

Banks mobilised $127.23 billion through Foreign Currency Non-Resident (Bank), or FCNR(B), deposits under the Reserve Bank of India's special swap facility by August 31, 2026. Add overseas foreign-currency borrowings and external commercial borrowings, and total mobilisation under RBI's special measures reached about $136.38 billion.

That is an extraordinary amount of foreign currency to raise in less than three months.

It strengthened India's external buffer, helped forex reserves reach a record $740.8 billion as of August 28, and gave RBI more room to manage volatility in the rupee.

But there is another side to the story.

When banks swap these dollars with RBI, RBI gives them rupees in return.

And those rupees have flooded the banking system.

By September 7, surplus banking liquidity had reached a record ₹11.6 lakh crore. RBI responded by taking more than ₹6 lakh crore out of the system in a single day.

The question now is not whether the scheme worked.

It clearly did.

The more interesting question is how RBI manages the consequences of that success.

What exactly was the special FCNR(B) facility?

FCNR(B) deposits are foreign-currency term deposits that eligible non-resident Indians can maintain with Indian banks.

Unlike an NRE rupee deposit, the money remains denominated in a foreign currency. That means the depositor is largely protected from rupee depreciation on the principal.

In June 2026, RBI made these deposits much more attractive to banks.

Eligible fresh FCNR(B) deposits with maturities of three to five years could be swapped with RBI.

Crucially, RBI took on the hedging cost for eligible deposits. The deposits also received CRR and SLR exemptions under the special arrangement.

This dramatically changed the economics for banks.

The facility became operational on June 8 and was originally meant to accept eligible deposits until September 30.

But the response was so strong that RBI brought the deadline forward to August 31.

Banks can still complete swaps against deposits mobilised before that deadline until September 11. Regular FCNR(B) deposits continue as a banking product, while the separate ECB and overseas-borrowing facilities remain open until December 31.

How extraordinary was the $127 billion mobilisation?

The obvious comparison is 2013.

During the taper tantrum, the rupee came under severe pressure and RBI introduced a special FCNR(B) swap window.

Banks mobilised around $26 billion through FCNR(B) deposits then.

This time, they raised:

That is almost 4.9 times the 2013 FCNR(B) amount.

If we use the broader comparison, RBI reported that its 2013 FCNR(B) and overseas-borrowing swap windows together attracted about $34.3 billion.

In 2026, the comparable total across FCNR(B), external commercial borrowings and overseas foreign-currency borrowings reached $136.38 billion by August-end.

The scale is difficult to ignore.

But describing all $127 billion as a simple vote of confidence in India would miss an important part of the story.

Why did so much money come in?

Confidence in India may have played a role.

But incentives mattered enormously.

Normally, a bank accepting a dollar deposit and using the money to fund rupee assets has a currency mismatch.

It can hedge that risk, but hedging costs money.

Under the special facility, RBI absorbed the hedging cost for eligible FCNR(B) deposits. Estimates at the time the scheme began put this hedge cost at roughly 3% to 3.5%.

That allowed banks to offer more attractive rates while removing a major foreign-exchange risk from their own books.

RBI later also clarified that banks could lend against eligible FCNR(B) deposits or facilitate borrowing against them, making leveraged structures possible for some depositors.

The success says something about confidence.

It also says a lot about incentive design.

What did the FCNR(B) inflows do to India's forex reserves?

They strengthened them substantially.

India's foreign-exchange reserves reached a record $740.8 billion in the week ended August 28, after rising sharply over the preceding weeks.

That is useful for RBI.

A larger reserve buffer gives the central bank more room to intervene when currency markets become disorderly.

And RBI has already been using that room.

Bankers reported that RBI sold at least $8 billion, and possibly considerably more, in the foreign-exchange market during the first week of September while managing rupee volatility.

But there is an important distinction.

So the transaction creates both:

• more usable foreign currency today;
• a future foreign-exchange obligation.

RBI's forward liabilities have therefore increased sharply as the swap programme has expanded.

That does not make the reserve increase meaningless.

RBI has more foreign-currency firepower today.

The hidden side of every dollar swap is rupee liquidity

Now we reach the harder part.

Suppose a bank brings $1 billion to RBI.

At an exchange rate of roughly ₹94-95 per dollar, RBI gives the bank about ₹94-95 billion in return.

Do that on the scale of $127.23 billion and the gross rupee injection can approach:

That is enormous.

But this number needs a caveat.

The gross liquidity created through the swaps is not the same as the final surplus liquidity sitting in the banking system.

Other forces simultaneously add or remove rupees:

• RBI's dollar sales
• government cash balances
• currency withdrawals by the public
• tax payments
• existing RBI liquidity operations
• maturing foreign-exchange positions

For example, RBI's recent dollar sales themselves remove rupees from the banking system because buyers pay rupees to RBI in exchange for dollars.

So actual liquidity keeps moving.

Still, the direction has been unmistakable.

The banking-system surplus reached ₹9.7 lakh crore by September 3, already above the previous 2021 record.

By September 7:

That was almost 4% of total banking deposits.

Why is too much banking liquidity a problem?

Banks having cash sounds like a good thing.

Up to a point, it is.

Adequate liquidity helps credit markets function smoothly and allows monetary-policy changes to pass through the financial system.

But ₹11.6 lakh crore of excess cash is a different situation.

When banks have far more money than they immediately need, short-term interest rates can fall too far below RBI's policy rate.

That weakens monetary-policy transmission.

Persistent excess liquidity can also:

• distort money-market pricing;
• push banks toward more aggressive lending;
• reduce the urgency to compete for deposits;
• affect bond-market pricing;
• potentially add to inflationary pressure if excess liquidity persists.

The challenge is finding the right amount.

RBI has already started taking the money back out

This is no longer a theoretical question.

On September 4, RBI announced a huge ₹7 lakh crore, 30-day Variable Rate Reverse Repo, or VRRR, including an early-redemption option for banks.

A VRRR is easier to understand than the name suggests.

The money temporarily leaves the active banking system.

On September 7, RBI accepted around:

• ₹3.53 lakh crore through an overnight liquidity operation;
• ₹2.59 lakh crore through the 30-day VRRR.

That meant RBI withdrew more than ₹6 lakh crore in one day.

By then, the central bank had carried out more than ₹8.5 lakh crore of liquidity-absorption operations.

But something else happened.

The 30-day VRRR had been sized at ₹7 lakh crore.

Banks parked only ₹2.59 lakh crore through it.

Why did a ₹7 lakh crore operation attract only ₹2.59 lakh crore?

Because having surplus cash today does not mean a bank wants to lock that money away for a month.

Banks have to think about:

• deposit withdrawals;
• loan demand;
• tax outflows;
• bond settlements;
• future liquidity requirements.

So many prefer shorter operations where they retain greater flexibility.

RBI even added an early-exit feature to the 30-day facility to make participation more attractive.

Yet the response remained much smaller than the amount offered.

Longer-tenor VRRRs may therefore be only one part of the solution.

What other tools can RBI use?

RBI has several options.

Banks have themselves suggested sell-buy foreign-exchange swaps because these can remove rupee liquidity without directly disturbing the government bond market.

Another possibility is the Cash Reserve Ratio.

CRR is currently 3%. Economists estimate that increasing it by 50-100 basis points could remove roughly ₹1.4-2.8 lakh crore from the system.

So RBI may prefer a combination of more targeted tools.

What does the FCNR(B) surge mean for banks?

There is a benefit here too.

Banks have spent years competing aggressively for domestic deposits while credit growth remained strong.

FCNR(B) suddenly gives them another large funding pool.

For participating banks, that can:

• ease funding pressure;
• reduce dependence on costly bulk deposits;
• support lending capacity;
• potentially reduce the need to keep raising domestic deposit rates aggressively.

But this does not mean $127 billion automatically solves India's deposit-credit mismatch.

Some FCNR(B) money is linked to loans or leveraged structures. Funding positions also differ considerably across banks.

What they do with that flexibility will depend on credit demand, margins and their own balance sheets.

What happens when these FCNR(B) deposits mature?

This is the long-term counterargument.

The money did not arrive permanently.

Eligible deposits have original maturities of three to five years, and reports suggest much of the mobilisation is toward the longer end of the range.

Eventually:

• the deposits mature;
• RBI's swaps mature;
• banks need dollars back;
• RBI has to manage those foreign-exchange obligations.

That does not mean $127 billion suddenly leaves India on one date.

Maturities differ. Some deposits may roll over. RBI can manage its forward book. New capital can enter India in the meantime.

The real task is therefore not just raising dollars.

It is making sure today's solution does not create an unmanageable maturity concentration several years later.

Was the FCNR(B) experiment a success?

On its immediate objective, yes.

India attracted:

• $127.23 billion through FCNR(B);
• $136.38 billion across the broader special forex measures;
• and forex reserves reached a record $740.8 billion by August 28.

That gives RBI more room to manage currency volatility at a time when oil prices and geopolitical risk remain high.

But the size of the success changed the problem.

With system liquidity touching ₹11.6 lakh crore and RBI already withdrawing more than ₹6 lakh crore in one day, the second phase has clearly begun.

That is a more complicated job than attracting the dollars in the first place.

FAQs

1. How much did banks raise through FCNR(B) deposits in 2026?

Banks mobilised approximately $127.23 billion through eligible FCNR(B) deposits by August 31, 2026. Total mobilisation across FCNR(B), overseas foreign-currency borrowings and external commercial borrowings reached about $136.38 billion.

2. What is an FCNR(B) deposit?

An FCNR(B) account is a foreign-currency term deposit available to eligible non-resident Indians through Indian banks. The deposit remains denominated in foreign currency rather than rupees.

3. Has the FCNR(B) scheme been discontinued?

No. Regular FCNR(B) deposits continue. What closed on August 31 was RBI's special swap facility for newly mobilised eligible FCNR(B) deposits. Banks can complete eligible swaps with RBI until September 11.

4. Why did FCNR(B) deposits rise so sharply in 2026?

A major reason was the favourable structure of RBI's special facility. RBI absorbed the hedging cost on eligible three-to-five-year deposits, while banks received CRR and SLR exemptions and greater flexibility to mobilise the deposits.

5. How much liquidity did the FCNR(B) scheme create?

The $127.23 billion FCNR(B) mobilisation can translate into roughly ₹12 lakh crore of gross rupee liquidity when swapped, depending on the exchange rate. Actual banking-system surplus liquidity reached a record ₹11.6 lakh crore on September 7 after accounting for other inflows and outflows.

6. How is RBI removing the excess liquidity?

RBI has used Variable Rate Reverse Repo operations, including overnight and 30-day auctions. It can also use foreign-exchange sell-buy swaps, Market Stabilisation Scheme securities, open-market bond sales or CRR changes if required.

7. Are the $127 billion of FCNR(B) deposits permanent forex reserves?

No. The swaps strengthen RBI's available foreign-currency position today, but RBI also has a future obligation to return dollars when the swaps mature. The reserves therefore need to be understood together with RBI's forward foreign-exchange liabilities.

Disclaimer: This article is for educational and informational purposes only. References to RBI operations, banking liquidity, foreign-exchange reserves, deposit rates and market conditions are based on publicly available information and may change as new data is released. This article does not constitute investment, banking, tax or financial advice.