In times of pressure on the Indian rupee, authorities have turned to a once-controversial measure to draw in substantial foreign capital. The Foreign Currency Non-Resident (Bank) or FCNR(B) deposit swap scheme, last used during the 2013 currency turmoil, has been reintroduced to bolster inflows and support the balance of payments.
FCNR(B) deposits allow non-resident Indians, persons of Indian origin, and overseas citizens of India to hold fixed-term deposits in major foreign currencies without immediate conversion into rupees. Under the revived scheme, the central bank assumes the full exchange rate risk for new three- to five-year deposits raised by banks until the end of September. This eliminates a key hedging cost for banks, enabling them to offer more competitive interest rates to overseas depositors.
In 2013, the scheme included a 3.5 percent subsidy to banks and successfully mobilized around $26 billion equivalent to about 1.4 percent of GDP at the time. This influx helped restore confidence in the rupee amid global market volatility triggered by expectations of tighter U.S. monetary policy. Although initially viewed with skepticism due to its potential expense, the initiative proved effective in reversing negative sentiment.
The current version is considered even more powerful. By fully covering exchange rate risks, it lowers the overall cost burden on banks compared to the earlier subsidy model. Banks can now potentially offer rates attractive enough to compete with global benchmarks, such as U.S. Treasury yields, while managing their exposure. Estimates suggest this could generate inflows on a similar or larger scale, potentially around $50 billion, contributing to broader efforts aimed at attracting up to $100 billion in foreign capital over the coming 12 to 24 months.
The economics behind the scheme rest on a calculated trade-off. While bearing hedging costs related to forward premiums in currency markets can appear expensive, significant inflows tend to strengthen the rupee. A firmer currency not only offsets some of those costs but also delivers wider benefits by reducing the import bill. With India’s annual imports now substantially higher than in 2013, even modest appreciation can translate into considerable savings.
This move forms part of a comprehensive package addressing balance of payments challenges, including a current account deficit and pressures on capital flows. Earlier projections of a sizable deficit for the upcoming fiscal year have been revised, with expectations now pointing toward a surplus or near balance. By facilitating stable foreign inflows, the scheme aims to ease rupee volatility and support macroeconomic stability without introducing new distortions.
Overall, the revival underscores a pragmatic approach: accepting short-term costs in exchange for long-term gains in investor confidence and external sector resilience.