Something unusual happened between June and August 2026.

An NRI with dollars sitting overseas could place them in an Indian FCNR(B) deposit for three to five years and, depending on the bank, earn rates that were unusually high for a dollar bank deposit.

Large banks were offering around 6%–6.25%, while some smaller banks went above 7%. ICICI Bank, for example, reportedly mobilised $17.88 billion, including deposits of $5 million or more priced at 6.25%. HDFC Bank was offering 6.25% on three-to-five-year USD deposits shortly before the window closed.

Then September arrived.

At HDFC Bank, the same three-to-five-year USD FCNR(B) rates dropped to 3.15%–3.50% from September 1.

What changed overnight?

Not America.

Not the dollar.

Not the depositor.

The RBI incentive disappeared.

And that incentive had helped create one of the largest foreign-currency mobilisation exercises India has ever seen.

In June, India was dealing with a familiar problem: pressure on the rupee, high oil prices and uncertainty around the balance of payments.

RBI wanted dollars.

Instead of simply defending the rupee by selling its existing reserves, it created a mechanism that encouraged Indian banks to go out and attract fresh foreign currency from NRIs.

On June 8, RBI introduced a special USD-INR swap facility for fresh FCNR(B) deposits with maturities of three to five years. Eligible deposits were also exempted from CRR and SLR requirements. On June 17, RBI temporarily removed the normal interest-rate ceiling for three-to-five-year FCNR(B) deposits, giving banks far more freedom to compete for NRI money.

The combination was powerful.

Banks could offer attractive rates.

NRIs could keep their money denominated in foreign currency rather than taking rupee risk.

And RBI would take the dollars from banks and give them rupees.

That last part is where the story becomes interesting.

Suppose an NRI deposits $1 million with an Indian bank.

The bank now owes that depositor $1 million back after three or five years, plus interest.

If the bank wants to convert those dollars into rupees and lend the money in India, it normally has a problem: what happens if the rupee falls sharply before the deposit matures?

The bank would generally have to hedge that currency risk. Long-term USD-INR hedging can be expensive.

RBI removed that problem.

Under the special scheme, the bank could give the $1 million to RBI today and receive rupees at the prevailing exchange rate. At maturity, the bank returns those rupees and RBI gives back the same $1 million at the same exchange rate.

The RBI circular explicitly states that both legs take place at the same rate—the swap is undertaken at par. Reuters therefore described the facility as providing banks with a zero-cost hedge.

So if the rupee moves from ₹95 to ₹110 over the next few years, the bank does not suddenly need ₹110 crore to repurchase every $1 million of principal.

RBI has effectively taken that principal currency risk away.

That made the economics unusually attractive for banks.

Yes.

This is where the economics are sometimes misunderstood.

RBI protects the principal through the swap. The bank still has to pay the NRI the interest promised on the FCNR(B) deposit.

Imagine a $100 deposit paying 6.25%.

The annual interest is $6.25.

If the rupee were to depreciate 4% over that year, the rupee cost of that dollar interest would increase by roughly the same proportion. Economically, that first year's interest burden becomes approximately 6.5% of the original rupee-equivalent principal, ignoring timing and compounding.

That is not insignificant.

But it is hardly extraordinary either.

Banks have been paying comparable rates for rupee deposits, while eligible FCNR(B) deposits under this scheme also enjoyed the benefits of zero principal hedging cost and CRR/SLR exemption. Fresh domestic term-deposit rates were already around the 6% range this year.

For many banks, therefore, this was not outrageously expensive funding.

It was potentially very useful funding.

When the facility began, banking-sector estimates suggested perhaps $40–50 billion of FCNR(B) mobilisation.

Instead, by August 31, banks had raised approximately:

Total foreign-currency mobilisation reached roughly $136.4 billion.

Even more remarkable was the finish.

On August 21, FCNR(B) mobilisation stood at $65.4 billion.

Ten days later, it was $127.2 billion.

Nearly $62 billion arrived in the final ten days alone.

The response became so large that RBI closed the FCNR(B) swap window on August 31, one month earlier than the originally planned September 30 deadline.

Sometimes a scheme closes because it fails.

This one appears to have closed because it worked too well.

This is the most interesting debate around the scheme.

A bank that tried to obtain a comparable long-term dollar hedge in the market could face a substantial forward premium.

RBI effectively gave eligible banks that hedge at zero premium.

So has RBI absorbed the cost?

The answer needs some nuance.

RBI does not have to go to another bank and purchase a hedge. It issues rupees itself, receives the dollars into its reserves, and commits to return those dollars several years later.

So there is no conventional market hedging bill that RBI pays.

But zero hedge premium does not mean zero economic cost.

When RBI gives banks rupees in exchange for all these dollars, the Indian banking system becomes extremely liquid. RBI then has to prevent that excess liquidity from pushing short-term rates too low or eventually feeding excessive credit and inflation.

That process is called sterilisation.

And it is already happening.

By September 3, India's banking-system liquidity surplus had surged to around ₹7.76 lakh crore, the highest in more than four years, while RBI was increasingly absorbing funds through instruments such as variable-rate reverse repos.

RBI Governor Sanjay Malhotra himself put the issue neatly: as more dollars arrive, their marginal benefit falls while the cost rises because the resulting liquidity must be sterilised for longer.

So the accurate conclusion is:

The hedge was free for the bank. It was not necessarily economically free for the central bank.

Because RBI received something extremely valuable in return.

Dollars. Lots of them.

India's foreign-exchange reserves were already at a record $729.3 billion by August 21, before the full final wave of FCNR(B) deposits was reflected. The latest inflows have significantly strengthened RBI's ability to intervene in the currency market.

That matters when:

In fact, the rupee strengthened to around ₹94.30 per dollar on September 3, a two-month high, with the huge foreign-currency inflows giving RBI far greater capacity to manage volatility.

RBI has effectively exchanged one problem—

pressure on external liquidity

—for another—

too much domestic liquidity.

The second problem is usually easier for a central bank to manage.

This may be the real story over the next 12–24 months.

Banks have suddenly received a massive pool of funding.

They now need to deploy it profitably.

That could support:

But cheap and abundant money always deserves monitoring.

If every bank suddenly wants to lend to the same handful of high-quality borrowers, loan pricing can fall and margins can compress. If banks stretch underwriting standards simply because they have money to deploy, future credit risk can rise.

That does not mean reckless lending is inevitable.

It means the next number worth watching may not be FCNR(B) deposits at all.

It may be where the banking system eventually lends the money.

There may be another quieter consequence.

If banks already have surplus liquidity, they have less reason to aggressively compete for domestic deposits.

We have already seen the weighted average rate on fresh rupee term deposits decline to 5.90% in July from 5.99% in June.

The FCNR(B) flood is not the only reason deposit rates may decline, but the additional liquidity strengthens that pressure.

So we could see an unusual combination:

Banks have more money. Borrowers may get better pricing. Savers may receive less.

That is how monetary transmission often works.

For NRIs who used the facility, there may be little to do immediately. You locked in an unusually attractive foreign-currency deposit rate for several years.

For those who missed it, chasing yesterday's opportunity usually makes little sense.

The more useful question is what role your foreign-currency money should now play.

Those questions matter more than finding another bank offering an extra 25 basis points.

The 6%+ FCNR(B) opportunity was exceptional.

The next opportunity may not look like a deposit at all.

The large inflows have left Indian banks with significantly more rupee liquidity. That matters because banks can now rely less on expensive deposits, support credit growth, and potentially lend more competitively.

The possible chain is simple:

FCNR inflows → more bank liquidity → easier credit → higher investment and consumption → stronger corporate earnings → support for equities.

The first beneficiaries to watch are banks and financial services, especially if funding costs remain manageable and credit growth stays healthy.

From there, the impact can spread to sectors that depend heavily on financing:

There is another important benefit. The inflows have also strengthened RBI’s foreign-exchange position, which can help reduce sharp rupee volatility. A more stable currency lowers one layer of risk for foreign investors and can improve the attractiveness of Indian equities.

But this is not automatically bullish.

If banks compete too aggressively, loan spreads can fall. If underwriting weakens, future asset-quality problems can emerge. And if excess liquidity becomes inflationary, RBI may have to absorb more of it.

So the key question is not:

“How much liquidity came in?”

It is:

“Where will this liquidity be deployed, and will it create profitable growth?”

For investors, that is the next story to track.

The FCNR window brought the dollars in. What banks do with the rupees may matter far more to the stock market.

If you have any doubt regarding what should you do next, feel free to write back to us. We are happy to help.

Warm regards,

Tejas