India appears to have successfully navigated the crisis that recently threatened the rupee—a storm driven by a massive exodus of foreign portfolio investors, war-induced crude oil inflation, international trade route blockades, and global currency speculation.
A central factor behind this newly minted exchange rate stability has been the aggressive mobilization of Foreign Currency Non-Resident Bank (FCNR-B) deposits, powered by the Reserve Bank of India’s (RBI) special swap scheme.
Under this mechanism, commercial banks were freed from the burden of currency hedging costs, which traditionally protect balance sheets against currency risk when foreign currency deposits are withdrawn after three to five years.
Encouraged by the swap framework, non-resident Indians poured $65.4 billion into FCNR-B accounts. Total foreign currency inflows under the scheme reached $72.8 billion for the week ending August 21, 2026. Consequently, India’s foreign exchange reserves surged from $672 billion at the launch of the initiative to $717 billion by mid-August. This massive influx provided vital support to the domestic currency.
After weakening to 97.15 against the U.S. dollar in May 2026, the rupee recovered to a stable range of 95 to 96. Beyond immediate relief, the episode restored confidence in the central bank’s capacity to accumulate foreign currency reserves during periods of stress, tapping into a historically reliable capital base.
Unlike short-term institutional capital, these diaspora deposits represent committed capital rather than volatile hot money. Non-resident Indian depositors act out of long-term economic alignment rather than the reactive, opaque ratings of global financial agencies.
To stem the exit of short-term capital, the government and SEBI simultaneously introduced a series of concessions aimed at Foreign Portfolio Investors (FPIs). Critics argue that foreign portfolio managers effectively pressured authorities by using capital flight to extract fiscal relief. The resulting regulatory changes streamlined administrative procedures to make domestic markets more competitive.
Most significantly, the government exempted FPIs from paying interest and capital gains taxes on specified government securities. While this direct concession did not completely halt external market volatility, foreign allocations toward Indian government debt subsequently rose to $6.8 billion, eventually peaking near $7.5 billion.
However, these tax breaks frequently resulted in FPIs merely swapping equity holdings for government bonds rather than bringing in net new capital, leaving market stability vulnerable to sudden shifts in global sentiment.
With the RBI opting for an early closure of the special swap facility by August 31, 2026, market commentators have raised concerns regarding potential fiscal side effects. Skeptics argue that assuming currency risk exposes the central bank to substantial liabilities when deposits mature, potentially shrinking future balance sheet profits, reducing dividend transfers to the government, and creating inflationary pressure.
These arguments overlook the fundamental mechanics of diaspora capital. First, FCNR-B deposits have historically exhibited minimal run-off risk, making the scenario of a sudden mass withdrawal highly improbable. When critics readily support continuous tax exemptions for speculative foreign portfolio investors, their intense scrutiny over a time-bound swap scheme for stable non-resident deposits appears disproportionate.
Second, the structural design of the swap minimizes systemic risk. The foreign exchange acquired through the scheme remains on the RBI’s balance sheet as a liquid reserve buffer. In the unlikely event that a significant portion of deposits is converted upon maturity, the payouts can be serviced directly from the underlying foreign currency corpus built by the inflows themselves. Furthermore, the central bank’s swap guarantee applies strictly to principal deposits, excluding accumulated interest.
Third, the facility offers timely support to the domestic banking sector. Indian banks have faced liquidity constraints due to rapid credit growth outstripping deposit formation, forcing them to raise capital at elevated interest rates. Mobilizing FCNR-B deposits provides commercial banks with approximately ₹9.5 lakh crore in stable, medium-term liquidity. This influx eases structural funding pressures and lowers borrowing costs across the wider economy.
Finally, the enhanced foreign exchange cushion provides essential protection against external supply shocks, unexpected oil price spikes, and broader financial contagion. Because the swap scheme specifically targets fresh three-to-five-year deposits, it secures a predictable maturity profile that volatile portfolio flows cannot match.
While foreign portfolio investments remain volatile and Foreign Direct Investment (FDI) incurs ongoing capital outflows through dividends, royalties, and technical fees, FCNR-B deposits offer a dependable, cost-effective balance sheet buffer. The diaspora liquidity scheme demonstrates that India can secure non-volatile foreign currency reserves to maintain economic resilience through periods of global instability.
(The author is National Co-convenor, Swadeshi Jagaran Manch and Former Professor, PGDAV College, University of Delhi; Views expressed are personal)
