The cost of the Reserve Bank of India’s (RBI’s) concessional swap facility for FCNR(B) deposits is unlikely to have been a factor behind the central bank’s decision to close the window a month ahead of schedule, with the cumulative hedging cost estimated at around $10.5 billion over five years, according to an SBI Research report.
The report estimates that FCNR(B) mobilisation could reach $60-65 billion, and $80-85 billion when overseas foreign currency borrowings (OFCBs) and external commercial borrowings (ECBs) are included.
SBI Research said the potential mobilisation of $65-70 billion, combined with an average dollar-rupee hedging cost of around 3 per cent annually, would imply an annual notional hedging cost of about $2.1 billion on a $70 billion corpus. “If this cost were to remain at 3 per cent over the five-year maturity of the deposits, the cumulative cost would amount to around 15 per cent of the corpus, or $10.5 billion,” the research report said.
However, the report said this cost should be viewed against the size of India’s foreign exchange reserves rather than the FCNR(B) corpus alone. With foreign exchange reserves at around $700 billion and incremental reserve accumulation assumed at roughly $20 billion annually, reserves could rise to around $800 billion over five years. On this basis, the five-year cumulative hedging cost of $10.5 billion would amount to 1.45 per cent of the current reserve stock and 1.27 per cent of the projected reserve stock, it said.
“Thus, even under a constant 3 per cent hedging-cost assumption, the notional cost of the FCNR(B) swap remains relatively small compared with the size of the reserve buffer being built,” SBI Research said, adding that the cost was unlikely to represent a significant trade-off against the objective of strengthening India’s external liquidity and reserve position.
The RBI last week announced that the special swap facility for fresh FCNR(B) deposits would close on August 31, a month earlier than the original September 30 deadline. The move came after more than $52 billion had been mobilised through the FCNR(B) route as of August 13.
The report said the RBI’s decision to truncate the window had come as a surprise to market participants, particularly after RBI Governor Sanjay Malhotra had indicated in a recent media interaction that there was no intention to close the scheme early.
SBI Research said there could be valid reasons for the early closure, with the most likely one being that the target for FCNR(B) mobilisation had already been achieved. It estimated that another $25-30 billion could flow in during the remaining days of August, taking total collections to around $85 billion, although its own estimate for FCNR(B) mobilisation was lower at $60-65 billion.
The report also said the balance of payments could remain in surplus by around $50 billion, with the current account deficit at around 1 per cent of GDP.
As of August 13, banks had mobilised $52.3 billion through FCNR(B) deposits, while OFCBs and ECBs had contributed another $2.8 billion and $1.7 billion, respectively. Total mobilisation under the three routes stood at $56.8 billion.
SBI Research noted that the RBI had recouped $31.2 billion of foreign currency assets by August 7, equivalent to around 55 per cent of the total amount mobilised. It said the RBI could use part of this amount to invest in US securities, given the higher yields.
As of May 2026, India’s holdings of US securities stood at $181 billion, down from $235 billion a year earlier, the report said, adding that there was scope to increase such holdings through further investment.
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