RBI’s surprise FCNR (B) move leaves banks scrambling as communication concerns grow: Report
The central bank’s decision to stop bearing hedging costs for foreign-currency deposits after August comes less than two weeks after Governor Sanjay Malhotra told reporters that there was “no proposal under consideration” to prematurely end the concession offered under the Foreign Currency Non-Resident (FCNR) deposit scheme.
- Aug 18, 2026,
- Updated Aug 18, 2026 5:46 PM IST
The Reserve Bank of India has surprised bankers, economists and traders by ending a special incentive for attracting foreign-currency deposits a month ahead of schedule, raising questions over its communication with financial markets, Bloomberg News reported.
The central bank’s decision to stop bearing hedging costs for foreign-currency deposits after August comes less than two weeks after Governor Sanjay Malhotra told reporters that there was “no proposal under consideration” to prematurely end the concession offered under the Foreign Currency Non-Resident (FCNR) deposit scheme.
The abrupt reversal has renewed concerns about policy communication. Markets reacted sharply, with the rupee recording its biggest decline in nearly a month and underperforming other Asian currencies. Yields on five-year government debt also posted their biggest rise in more than a month.
“The power of effective central bank communication lies in its ability to shape expectations and guide market behavior well beyond the immediate policy action,” Madhavi Arora, an economist at Emkay Global Financial Services Ltd., told Bloomberg News. “Markets can adjust to policy changes; what they find harder to price is uncertainty around the policy framework.”
MUST READ: RBI’s FCNR (B) swap window saw strong inflows. Why then was it closed early?
Why did RBI end the incentive?
The RBI’s decision followed criticism over the cost of the FCNR deposit scheme. Former RBI Governor Duvvuri Subbarao had recently told Bloomberg News that the deposits were costly. However, several economists argued that the central bank could absorb the hedging costs given its large foreign-exchange reserves.
State Bank of India Group Chief Economic Adviser Soumya Kanti Ghosh estimated the cumulative cost at about $10.5 billion, compared with the RBI’s foreign-exchange reserves of around $700 billion. “We don’t believe that the cost of swap could have been a constraining factor,” he said.
The scheme has already attracted about $52 billion. Bankers estimate another $25 billion to $30 billion could flow in by the end of August, potentially taking total mobilisation to around $80 billion-$85 billion.
Radhika Rao, an economist at DBS Bank, also said the hedging cost was unlikely to have been the binding factor, arguing that funds raised so far were sufficient to strengthen India’s balance of payments.
ALSO READ: FCNR(B) inflows could reach $85 bn including ECBs, OFCBs, says SBI Research
Banks face tighter deadline
The sudden closure has created operational challenges for banks that had planned their fundraising assuming the scheme would continue until September. SBI, India’s largest lender, had committed to raising $10 billion and had mobilised around $6 billion by the first week of August.
Bankers said they now have to redraw asset-liability profiles and accelerate paperwork for existing and potential clients. Attracting new customers is particularly difficult because opening FCNR (B) accounts and arranging overseas funds typically takes 15 to 20 days.
MUST READ: RBI gives $50 billion boost: How FCNR(B) deposits are strengthening India’s forex position
The Reserve Bank of India has surprised bankers, economists and traders by ending a special incentive for attracting foreign-currency deposits a month ahead of schedule, raising questions over its communication with financial markets, Bloomberg News reported.
The central bank’s decision to stop bearing hedging costs for foreign-currency deposits after August comes less than two weeks after Governor Sanjay Malhotra told reporters that there was “no proposal under consideration” to prematurely end the concession offered under the Foreign Currency Non-Resident (FCNR) deposit scheme.
The abrupt reversal has renewed concerns about policy communication. Markets reacted sharply, with the rupee recording its biggest decline in nearly a month and underperforming other Asian currencies. Yields on five-year government debt also posted their biggest rise in more than a month.
“The power of effective central bank communication lies in its ability to shape expectations and guide market behavior well beyond the immediate policy action,” Madhavi Arora, an economist at Emkay Global Financial Services Ltd., told Bloomberg News. “Markets can adjust to policy changes; what they find harder to price is uncertainty around the policy framework.”
MUST READ: RBI’s FCNR (B) swap window saw strong inflows. Why then was it closed early?
Why did RBI end the incentive?
The RBI’s decision followed criticism over the cost of the FCNR deposit scheme. Former RBI Governor Duvvuri Subbarao had recently told Bloomberg News that the deposits were costly. However, several economists argued that the central bank could absorb the hedging costs given its large foreign-exchange reserves.
State Bank of India Group Chief Economic Adviser Soumya Kanti Ghosh estimated the cumulative cost at about $10.5 billion, compared with the RBI’s foreign-exchange reserves of around $700 billion. “We don’t believe that the cost of swap could have been a constraining factor,” he said.
The scheme has already attracted about $52 billion. Bankers estimate another $25 billion to $30 billion could flow in by the end of August, potentially taking total mobilisation to around $80 billion-$85 billion.
Radhika Rao, an economist at DBS Bank, also said the hedging cost was unlikely to have been the binding factor, arguing that funds raised so far were sufficient to strengthen India’s balance of payments.
ALSO READ: FCNR(B) inflows could reach $85 bn including ECBs, OFCBs, says SBI Research
Banks face tighter deadline
The sudden closure has created operational challenges for banks that had planned their fundraising assuming the scheme would continue until September. SBI, India’s largest lender, had committed to raising $10 billion and had mobilised around $6 billion by the first week of August.
Bankers said they now have to redraw asset-liability profiles and accelerate paperwork for existing and potential clients. Attracting new customers is particularly difficult because opening FCNR (B) accounts and arranging overseas funds typically takes 15 to 20 days.
MUST READ: RBI gives $50 billion boost: How FCNR(B) deposits are strengthening India’s forex position