The Reserve Bank of India has a habit of surprising the market even when the underlying news is, by most measures, good. That’s roughly what happened this past week when the central bank announced it would close its special FCNR(B) swap facility on August 31, a full month earlier than the originally planned September 30 deadline. The reaction on Dalal Street was swift and not exactly celebratory, with banking stocks sliding and dragging broader indices down alongside them.
For anyone who hasn’t been tracking the scheme closely, some quick background helps. Back on June 8, the RBI rolled out a special USD-INR forex swap facility aimed at foreign currency non-resident, or FCNR(B), deposits, along with related channels like external commercial borrowings (ECBs) and overseas foreign currency borrowings (OFCBs). The idea was straightforward: make it more attractive for NRIs to park long-term foreign currency deposits in Indian banks by having the central bank absorb the hedging costs, which in turn would help shore up the rupee and boost the country’s forex reserves.
By any reasonable measure, the scheme worked better than expected. As of August 13, FCNR(B) deposits alone had pulled in $52.3 billion, with total inflows across all three channels touching $56.85 billion. India’s foreign exchange reserves climbed past $707 billion in the process. Given those numbers, the RBI’s decision to close the deposit mobilisation window early doesn’t look like retreat so much as a central bank deciding it has already gotten what it needed.
What made the timing feel abrupt is that RBI Governor Sanjay Malhotra had explicitly ruled out an early closure just over a week before the announcement. At the August 5 monetary policy press conference, Malhotra said there was “no proposal under consideration” to end the scheme prematurely. Nine days later, the RBI did exactly that, moving the FCNR(B) deposit deadline to August 31 and the swap execution deadline to September 11, down from October 16. That reversal is part of why markets reacted the way they did. It wasn’t just the news itself, but the whiplash of a change in stance within such a short window.
Major lenders bore the brunt of the selloff. HDFC Bank, ICICI Bank, Kotak Mahindra Bank, State Bank of India, and Axis Bank all traded lower in the sessions following the announcement. The concern isn’t really about the money already raised, since those deposits and their favorable terms remain locked in for the full three-to-five year tenor. Instead, investors appear to be worried about what happens next: banks that had been counting on a longer runway to mobilise foreign-currency deposits, or that had already made commitments to customers, may now need to scramble for shorter-term overseas funding, potentially at higher costs, before refinancing through longer-term instruments. Some lenders, including ICICI Bank and Punjab National Bank, have reportedly already moved to secure offshore loans to bridge the gap.
It’s worth noting that the RBI didn’t shut everything down at once. The parallel swap facility covering ECBs and OFCBs remains open until December 31, 2026, unchanged from the original schedule. Only the FCNR(B) deposit route got the early cutoff, and the RBI’s own explanation points to the scheme’s success rather than any underlying weakness: the facility had simply “received a very good response,” in the central bank’s words, and continuing to draw in more dollars would have meant taking on additional rupee liquidity and balance-sheet liabilities that the RBI apparently decided it didn’t need.
Economists reading into the move see it less as a dramatic shift in monetary policy and more as a cost-benefit recalibration. With reserves already comfortably above $700 billion, the marginal value of pulling in still more foreign currency through a subsidised swap scheme starts to diminish, especially when the RBI is effectively footing the hedging bill for banks. Some analysts have framed the early closure as a sign of confidence in India’s reserve buffers rather than a warning signal about rupee stability. Still, the surprise nature of the announcement, landing so soon after the governor’s public reassurance, has left some market watchers wondering whether the central bank is being fully transparent about its internal deliberations, or whether the data simply moved faster than anticipated.
There’s also a broader backdrop worth mentioning. Global risk sentiment has remained fragile amid Middle East-driven volatility, and India’s central bank operations don’t happen in isolation from that turbulence. The rupee has stayed largely range-bound against the dollar in recent months, partly thanks to RBI intervention, and the FCNR(B) episode fits into a larger pattern of the central bank actively managing external liabilities and currency stability rather than leaving things purely to market forces.
For NRIs who had been considering an FCNR(B) deposit under the concessional scheme, the message is simple: the window to lock in favourable swap-backed rates now closes on August 31, after which terms are expected to revert closer to the standard 3-4% range that prevailed before the scheme began. For the broader banking sector, the bigger question is how quickly lenders can adjust their foreign-currency funding strategies, and whether this week’s stock market jitters prove to be a brief overreaction or the start of a more sustained rethink of how Indian banks source dollars going forward.
