RBI Faces Significant Cost for Record Diaspora Deposits
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RBI Faces Significant Cost for Record Diaspora Deposits
- India's central bank, the Reserve Bank of India (RBI), could incur a cost of approximately $10.6 billion due to a special foreign currency deposit program that attracted a record $127 billion from its diaspora.
- This potential cost stems from the RBI's decision, announced in June 2026, to absorb the currency hedging costs for banks that mobilized these Foreign Currency Non-Resident (Bank) or FCNR(B) deposits.
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The Reserve Bank of India (RBI) launched a special deposit program in June 2026 to attract foreign currency from non-resident Indians (NRIs), aiming to bolster India’s foreign exchange liquidity and stabilize the rupee amidst global uncertainties. The program, known as Foreign Currency Non-Resident (Bank) or FCNR(B) deposits, allowed NRIs to place fixed-term deposits in foreign currencies with Indian banks, with both principal and interest repaid in the same currency, thereby shielding them from rupee exchange-rate fluctuations.
To make these deposits more attractive, the RBI offered a concessional swap facility to authorized banks, absorbing the currency hedging costs, which typically range from 3% to 3.5% annually for three to five years. This allowed banks to offer significantly higher, tax-free interest rates, reportedly ranging from 5.5% to 7.5%, and in some cases even higher, to NRI depositors. The initiative proved highly successful, attracting a record $127.23 billion in FCNR(B) deposits by August 31, 2026, far exceeding the RBI’s initial estimate of $80 billion. Including other foreign currency borrowings, total inflows reached $136.38 billion. The strong response led the RBI to close the FCNR(B) window a month ahead of its scheduled September 30, 2026, deadline.
However, this fundraising success comes with a substantial potential cost for the RBI, estimated to be around $10.6 billion (approximately 1.2 trillion rupees) over five years. This cost is primarily due to the central bank’s commitment to cover the hedging expenses for banks. Additionally, the RBI will need to manage the increased rupee liquidity in the banking system as lenders exchange their dollar proceeds with the central bank. While the final bill depends on how the dollar proceeds are invested, economists like Madhavi Arora of Emkay Global Financial Services have highlighted the indirect fiscal cost, potentially impacting the RBI’s dividend to the government. Despite the cost, the massive inflow has significantly boosted India’s foreign exchange reserves to a record high of approximately $729.3 billion, providing a substantial buffer against external pressures and supporting the rupee.