FCNR deposit bonanza: Economists explain why deft liquidity management will be key
The overall liquidity surplus in the banking system has touched Rs 9.7 lakh crore as of September 3, aided by the huge inflows banks saw IN FCNR (B) deposits
- Sep 3, 2026,
- Updated Sep 3, 2026 9:09 PM IST
The special concessionary swap window announced by the Reserve Bank of India to shore up foreign exchange reserves saw a record inflow through FCNR (B) deposits, driving banking sector liquidity to a multi-year high.
The overall liquidity surplus in the banking system has touched Rs 9.7 lakh crore. Daily average surplus averaged Rs 3.67 lakh crore in August, more than three times July’s Rs 1.07 lakh crore, according to analysts.
The special window, which was closed at the end of August, garnered $127 billion in FCNR (B) deposits alone, which was significantly higher than the $26 billion that were raised in a similar window back in 2013.
In the backdrop of the huge inflows, the rupee has kind of stabilised, ending Thursday, September 3, at a 10-week closing high of around 94.48 against the US dollar. The rupee hit a record low of 96.96 against the greenback in May.
The flows will strengthen the forex kitty, with economists now estimating overall foreign exchange reserves to now cross $750 billion. That should provide considerable firepower for the central bank to defend the rupee, should new currency pressures arise.
But, the huge banking sector liquidity will also call for deft handling by the RBI, experts say.
"Given the swap arrangement, these inflows will add to an already abundant rupee liquidity backdrop, which was at a four year high this month, depressing overnight rates," noted Radhika Rao, senior economist and executive director at DBS Bank.
"While organic drivers like tax-related outflows, and seasonal currency leakage, in addition to current account deficit (seen at 1.1% of GDP), portfolio outflows, and maturity of the forwards book will act as counter-balancing factors, yet concerted steps will be required to drain the potential surge in liquidity," said Rao.
What can RBI to do mop up the excess liquidity?
Some of the near-term measures that could be considered include an increase in cash reserve ratio (CRR). It is essentially the percentage of total deposits that a bank must maintain with RBI as cash. A hike in CRR means banks will need to park more money with RBI.
RBI could also look at open market operations (OMO) to shore up some excess liquidity.
"The RBI has been running back-to-back Variable Rate Reverse Repo (VRRR) auctions on successive days," pointed Sneha Pandey, fund manager - equity at Quantum AMC.
However, uptake has been patchy, she adds; the Rs 6 lakh crore seven-day auction drew bids of just Rs 1.14 lakh crore, because "banks prefer to park at 1 to 3 days and keep their powder dry for credit demand."
Another important point is that some of the large banks garnered more FCNR deposits than others and so the system-level liquidity surplus is masking this unevenness, notes Pandey.
"The RBI may initially deploy a mix of liquidity management tools, including longer-tenor VRRR operations and OMO sales, to absorb the emerging surplus liquidity," feels Rajani Sinha, chief economist at CAREEdge Ratings.
She also feels that if the the surplus remains persistent, the RBI may look at CRR. However, she pointed that this could counteract the benefit of the exemption from CRR and Statutory Liquidity Ratio (SLR), which was given to banks for raising FCNR deposits.
ALSO READ: RBI's forex swap facility draws massive $127 billion through FCNR(B) deposits
Aditi Gupta, economist at Bank of Baroda, estimates liquidity surplus may peak in September.
"Seasonal increase in currency in circulation during the festive season, RBI’s forex intervention to stabilise the rupee (if needed) and maturity of RBI’s forward position would help in draining out the excess liquidity in the system," she felt.
An important point to remember is that these FCNR (B) will mature in 3-5 years, and the NRI depositors who rushed to park their dollars in these deposits now will want their money back.
Some worry that the dollar demand increase at that time could once again put pressure on the rupee.
Rao of DBS Bank says a portion of the existing reserve stock could be earmarked against these liabilities, helping to mitigate those concerns.
The special concessionary swap window announced by the Reserve Bank of India to shore up foreign exchange reserves saw a record inflow through FCNR (B) deposits, driving banking sector liquidity to a multi-year high.
The overall liquidity surplus in the banking system has touched Rs 9.7 lakh crore. Daily average surplus averaged Rs 3.67 lakh crore in August, more than three times July’s Rs 1.07 lakh crore, according to analysts.
The special window, which was closed at the end of August, garnered $127 billion in FCNR (B) deposits alone, which was significantly higher than the $26 billion that were raised in a similar window back in 2013.
In the backdrop of the huge inflows, the rupee has kind of stabilised, ending Thursday, September 3, at a 10-week closing high of around 94.48 against the US dollar. The rupee hit a record low of 96.96 against the greenback in May.
The flows will strengthen the forex kitty, with economists now estimating overall foreign exchange reserves to now cross $750 billion. That should provide considerable firepower for the central bank to defend the rupee, should new currency pressures arise.
But, the huge banking sector liquidity will also call for deft handling by the RBI, experts say.
"Given the swap arrangement, these inflows will add to an already abundant rupee liquidity backdrop, which was at a four year high this month, depressing overnight rates," noted Radhika Rao, senior economist and executive director at DBS Bank.
"While organic drivers like tax-related outflows, and seasonal currency leakage, in addition to current account deficit (seen at 1.1% of GDP), portfolio outflows, and maturity of the forwards book will act as counter-balancing factors, yet concerted steps will be required to drain the potential surge in liquidity," said Rao.
What can RBI to do mop up the excess liquidity?
Some of the near-term measures that could be considered include an increase in cash reserve ratio (CRR). It is essentially the percentage of total deposits that a bank must maintain with RBI as cash. A hike in CRR means banks will need to park more money with RBI.
RBI could also look at open market operations (OMO) to shore up some excess liquidity.
"The RBI has been running back-to-back Variable Rate Reverse Repo (VRRR) auctions on successive days," pointed Sneha Pandey, fund manager - equity at Quantum AMC.
However, uptake has been patchy, she adds; the Rs 6 lakh crore seven-day auction drew bids of just Rs 1.14 lakh crore, because "banks prefer to park at 1 to 3 days and keep their powder dry for credit demand."
Another important point is that some of the large banks garnered more FCNR deposits than others and so the system-level liquidity surplus is masking this unevenness, notes Pandey.
"The RBI may initially deploy a mix of liquidity management tools, including longer-tenor VRRR operations and OMO sales, to absorb the emerging surplus liquidity," feels Rajani Sinha, chief economist at CAREEdge Ratings.
She also feels that if the the surplus remains persistent, the RBI may look at CRR. However, she pointed that this could counteract the benefit of the exemption from CRR and Statutory Liquidity Ratio (SLR), which was given to banks for raising FCNR deposits.
ALSO READ: RBI's forex swap facility draws massive $127 billion through FCNR(B) deposits
Aditi Gupta, economist at Bank of Baroda, estimates liquidity surplus may peak in September.
"Seasonal increase in currency in circulation during the festive season, RBI’s forex intervention to stabilise the rupee (if needed) and maturity of RBI’s forward position would help in draining out the excess liquidity in the system," she felt.
An important point to remember is that these FCNR (B) will mature in 3-5 years, and the NRI depositors who rushed to park their dollars in these deposits now will want their money back.
Some worry that the dollar demand increase at that time could once again put pressure on the rupee.
Rao of DBS Bank says a portion of the existing reserve stock could be earmarked against these liabilities, helping to mitigate those concerns.