FCNR(B) deposits push forex reserves to all-time high of $729 bn in August

Why in the News

The Reserve Bank of India’s concessional swap window for Foreign Currency Non-Resident (Bank), or FCNR(B), deposits has propelled India’s foreign exchange reserves to a record $729.33 billion as of 21 August, surpassing the previous all-time high of $728.49 billion recorded on 27 February, just a day before the United States and Israel struck Iran and touched off the West Asia conflict that drove global energy prices sharply higher. Reserves rose by $12.42 billion in the week ended 21 August alone, with FCNR(B) inflows of $65.4 billion accounting for most of the $72.85 billion that has entered India since three concessional swap windows opened on 8 June.

What is driving reserves to a record, and what does the FCNR(B) window actually do?

1. Scale of inflows: FCNR(B) deposits outstanding rose from $34.04 billion at the end of May to $65.4 billion by 21 August, since the window opened on 8 June, and reserves themselves jumped $12.42 billion in the week ended 21 August.
2. Mechanism: Under the FCNR(B) scheme the central bank bears the full exchange rate risk on these non-resident deposits, since the money is held in foreign currency rather than converted into rupees, which let banks offer interest rates as high as 7.4 percent.
3. Leveraged NRI participation: Non-resident Indians have also borrowed at lower interest rates abroad to deposit the proceeds into FCNR(B) accounts, earning returns of as much as 15 percent on the resulting spread.

Why did reserves need rebuilding in the first place?

1. The rupee was already under stress before the record: The rupee came under intense pressure from large foreign portfolio outflows, with $19 billion leaving Indian markets in 2025 and a further $24 billion in the first five months of 2026, pushing the currency to near 97 per dollar in mid-May.
2. The West Asia conflict added an oil import shock: Since roughly 85 percent of India’s crude oil needs are met through imports, the conflict’s closure-driven spike in global energy prices raised the country’s import bill and added further pressure on the rupee just as reserves were near their earlier February high.
3. The rupee remains down year-on-year despite the record reserves: The rupee closed at 95.39 per dollar on Friday, little changed from its 95.79 level on 4 June and still 8.1 percent weaker than a year earlier, showing the reserve build has stabilised rather than reversed the currency’s decline.

What other measures accompanied the FCNR(B) window?

1. Two additional swap windows: Announced alongside FCNR(B) on 5 June, swap facilities for Overseas Foreign Currency Borrowings and External Commercial Borrowings have together brought in $4.86 billion and $2.59 billion respectively since 8 June.
2. Tax relief for foreign portfolio investors: The government removed capital gains and withholding taxes on foreign portfolio investment in government securities as part of the same package meant to pull in capital and support the rupee.
3. An accelerated closure timeline: Because inflows arrived faster than expected, the RBI moved the FCNR(B) window’s closing date to 31 August, a month earlier than the originally announced 30 September deadline.

Challenges to relying on FCNR(B)-driven reserve accumulation

1. Weak currency response relative to precedent: The rupee has barely moved during this swap window, compared with the 2013 episode when the rupee rose 10.3 percent, from 67.6 to 61.3 per dollar, in the first 40 days after the RBI’s then-Governor introduced a similar FCNR(B) swap facility. Eg. The rupee moved from 95.79 to 95.39 per dollar between 4 June and 29 August this year, a fraction of the 2013 currency response to a comparable scheme. Fix. Pair reserve accumulation with structural measures that improve the current account, such as diversifying energy import sources, rather than treating swap-driven capital inflows alone as sufficient to support the currency.
2. Reversal risk from leveraged hot money: A meaningful share of FCNR(B) inflows has been driven by non-resident Indians borrowing cheaply abroad to arbitrage into high-yield deposits, a flow that can reverse quickly once interest rate differentials narrow or the window closes. Eg. The window’s early closure on 31 August, a month ahead of schedule, was itself driven by inflows arriving faster than expected, which cuts both ways once the scheme ends and deposits mature. Fix. Stagger FCNR(B) maturities and monitor the redemption schedule closely to avoid a sudden reserve drawdown when large deposit tranches come due.

Conclusion

The FCNR(B) swap window has pushed India’s foreign exchange reserves past their previous February high to a record $729.33 billion, giving the Reserve Bank of India greater capacity to defend the rupee after a period of heavy foreign portfolio outflows and an oil price shock from the West Asia conflict. The rupee’s limited appreciation despite the record inflow, unlike the sharper rupee gains seen after the comparable 2013 swap window, signals the current build is cushioning rather than reversing currency pressure.

Back2Basics: What are FCNR(B) deposits?

1. FCNR(B) deposits are foreign currency accounts that non-resident Indians can hold with Indian banks, where the deposit and its returns stay denominated in the foreign currency rather than in rupees.
2. The scheme shifts exchange rate risk onto the Reserve Bank of India rather than the depositor or the bank, which lets banks offer higher interest rates to attract inflows during periods of currency pressure.
3. India last used a similar concessional FCNR(B) swap window in 2013, under then RBI Governor Raghuram Rajan, to stabilise the rupee following a sharp depreciation.

Matching Previous Year Question

No direct PYQ traced in the provided files (Pass 1: FCNR(B), forex reserves record — no match; Pass 2: balance of payments, current account — matches found were conceptually unrelated to a record reserves event).