On 5 June, the Reserve Bank of India (RBI) announced three big schemes to attract debt flows from non-resident Indians (NRIs) and foreign lenders to shore up falling foreign reserves.
India's apex bank decided to bear 100 percent of the hedging cost of foreign currency non-resident [FCNR(B)] deposits, making it cheaper for banks to raise investible resources and NRIs to earn higher interest.
The RBI also agreed to bear 50 percent swap cost for external commercial borrowings (ECBs) raised by PSUs as well as overseas foreign currency borrowings (OFCBs) raised by banks.
The FCNR(B) window is open till 30 September 2026. The window for PSUs and banks will go on till 31 December 2026.
Are these schemes sound, a last refuge, or a gamble? How have they worked so far? Have they brought substantial inflows for the RBI? How is the rupee doing? And what happens after the windows shut?
The Inflow Puzzle
A week back, the RBI issued a statement claiming that "swap facility has seen avid interest and attracted steady forex inflows".
Till 17 July, the RBI reported that:
$17.406 billion were mobilised in FCNR(B) deposits
$1.970 billion in OFCBs
$1.342 billion in ECBs
That totals to $20.718 billion. No more details were provided.
For FCNR(B) deposits, it was not known whether $17.406 billion are gross inflows or net. There is no information whether the FCNR(B) deposits are new inflows or NRIs converted existing non-resident external (NRE) deposits into FCNR(B).
There are three types of NRI deposit schemes—FCNR(B), NRE, and non-resident ordinary (NRO). NRE deposits are similar to FCNR(B), except that foreign exchange risk is on the depositor. NRO deposits are non-repatriable as well.
The RBI reports their data with a lag.
The RBI bulletin, released on 22 July, has the data only until May 2026. Total NRI deposits at the end of May 2026 at $165.963 billion—FCNR(B) $34.038 billion, NRE $98.396 billion, and NRO $33.529 billion—were somewhat less than $166.720 billion a year before, and a little more than $165.654 billion at the end of March 2026.
The RBI provides weekly status of the forex reserves. The RBI debt scheme inflows affect the foreign currency asset (FCA) component of forex reserves.
As of 5 June, the RBI held $543.444 billion in FCAs ($681.610 billion total reserves).
On 17 July, as per the available data, FCAs increased to $551.057 billion (reserves $676.237 billion), recording an increase of $7.613 billion—$13.105 billion or 63 percent less than the inflows of $20.718 billion claimed to have been received by the RBI.
An argument can be made that the overall FCAs might have gone down by this amount if $20.718 billion would not have been received. One does not know. The RBI must clarify, and until such clarifications are available, doubts would persist. Net FCNR(B) inflows might actually be much less.
The Risks Involved
At the time of the launch, the RBI provided no estimates of expected inflows from the schemes. Many financial institutions did. The State Bank of India (SBI) research estimated inflows of $55-70 billion. Market participants’ estimates ranged between $50 billion and $80 billion.
A similar FCNR(B) deposit scheme, which was launched in 2013, yielded inflows of $26 billion. Banks were also offered a concessional window that year to swap their foreign borrowings into rupees at a concession rate of 1 percent below the market, which brought in $8 billion. Total inflows amounted to $34 billion.
How are the schemes performing in this edition?
The PSUs have so far announced the programme to raise about $5 billion in ECBs using the RBI’s concessional swap (1.5 percent) window.
HUDCO = $1 billion
NaBFID = Between $2 and $3 billion
PFC & REC = $1 to $2 billion
Energy sector PSUs (NTPC, Indian Oil, etc) = $1-2 billion.
No funds have been raised. It is, however, quite likely that the PSUs will complete this programme.
The banks have been more proactive. HDFC Bank has raised $750 million, ICICI $1 billion, Axis Bank $800 million, and SBI $1.9 billion, totalling about $4.5 billion so far. The cost of banks’ borrowing under the window, however, has been rising (HDFC Bank 90 basis points, and Axis Bank 110 basis points over US treasuries). Some PSBs like Bank of Baroda have deferred or cancelled their plans. The banks might raise anywhere between $10 billion and $15 billion.
As the RBI concessional window for PSUs and banks is open till 31 December, it seems their overall borrowings would be around $20 billion.
FCNR(B) deposits’ performance case is trickier.
Banks have announced attractive interest rates (6-7 percent for five-year deposits) and are also offering high leverage facilities (9 to 15 times of deposits made from own funds). With leveraged funds yielding returns of 0.5 percent or more, total return on own source FCNR(B) deposits go up to 12 percent to 15 percent.
Still, there is no visible enthusiasm.
There are tax issues in important jurisdictions, taxing interest receipts at gross and disallowing deduction of interest paid on leveraged funds. Some jurisdictions have disallowed leverage itself. The NRIs are also getting quite an attractive interest on their deposits in the US, the UK, the UAE, and others, making them much less interested in earning 1-2 percent extra interest on similar deposits in India.
There will be some conversion from NRE deposits into FCNR(B) deposits as well as NRE, quite substantial at about $100 billion. If an NRI can get the same interest on dollar deposits as he gets it on rupee deposits, and the rupee risk also evaporates, why should they keep more funds in NRE deposits and not shift the same into FCNR(B)?
Considering all factors, it seems that net inflows into NRI deposits might end up between $15 and $20 billion as well. Total net inflows in the three RBI schemes are unlikely to exceed $40 billion.
A Self-Defeating Gamble
With net FDI inflows turning cold (averaged $5 billion) and FPIs equity inflows seriously negative ($16 billion per year) during the last two years (2024-2026), the RBI was desperate to do something to protect foreign currency reserves increasingly at risk.
The three schemes announced on 5 June are all foreign currency debt-oriented schemes. India’s policy preferences has always been, in order of, remittances, FDI, FPI, and debt flows for very sound reasons. Debt inflows do not contribute directly to raising productive investments in the economy (it provides leverage to equity). Debts have to be regularly serviced and repaid on due maturity. It can also be recalled or prematurely terminated.
Therefore, the announcement of only debt-oriented schemes and nothing on remittances, FDI and FPIs, clearly indicated the RBI’s desperation.
These schemes thus have major costs. Occasional use in temporary circumstances (like in 2013) can be justified. But not, when the fundamentals are weak—and measures are taken in desperate situations.
An insidious and dangerous self-interest explains the RBI’s offering to bear hedging cost. If the rupee depreciates, the RBI’s profits rise, enabling it to larger dividends to the government as well. If the rupee does not depreciate, there is no hedging cost. Therefore, it does not matter for the RBI to offer subsidised or full hedge cost on foreign borrowings.
The nation, however, pays dearly. With debt liabilities rising, the rupee depreciates. The cost of import and servicing loans go up. Inflation rises. People suffer. Investments suffer.
Can The Rupee Survive This?
The day the RBI announced the schemes, the rupee was at 95.39 to a dollar. It was expected to improve to Rs 92-93 in the short term.
The rupee did appreciate to 94.33 on 19 June. Since then, however, it is on the way down. On 24 July, it traded at 96.57 to a dollar, higher than at the start of the schemes.
The rupee has not strengthened from the RBI debt scheme. Why is it? Is it because of the Iran-US war or oil price increase or both?
Or the market is sensing that no large inflows are likely to come from the schemes?
I believe it is the larger lack of confidence in the rupee, including on account of the Iran-US war and oil price rise.
In case, as is likely, the three RBI schemes turn out to be unsuccessful (less than $50 billion net are raised), temporary optimism about the rupee will also disappear. The RBI is unlikely to extend the FCNR(B) scheme beyond 30 September. If it does, it will be a sign of greater desperation.
ECBs and OFCBs supported by the RBI, bearing part of the swap cost, would hurt India’s credit, raising the borrowing costs of Indian businesses and banks for a much longer time. It is better to avoid such schemes.
(The author is an economic and fiscal policy advisor, SUBHANJALI, former Finance & Economic Affairs Secretary, and author of 'The $10 Trillion Dream'. This is an opinion piece and the views expressed are the author’s own. The Quint neither endorses nor is responsible for them.)