Why RBI closed FCNR(B) window early despite ruling it out two weeks earlier

The Reserve Bank of India’s decision to advance the closure of its Foreign Currency Non-Resident (Bank), or FCNR(B), deposit mobilisation scheme has raised questions over a sharp shift in communication within weeks. RBI Governor Sanjay Malhotra, however, has rejected the description of a “U-turn”, calling the move a data-driven and calibrated response to rapidly changing conditions.

What changed after the MPC meeting?

At the Monetary Policy Committee meeting earlier this month, Malhotra had said there was no proposal to close the facility prematurely. “As of now, there is no proposal under consideration to close the scheme prematurely,” he had said at the post-policy press conference.

The RBI subsequently announced on August 14 that the scheme would be closed a month earlier than originally planned, citing stronger-than-expected dollar inflows.

In an interview with The Financial Express, Malhotra highlighted the wording of his earlier statement, particularly the phrase “as of now”. He said the RBI was still assessing a situation that was evolving rapidly and had not ruled out an early closure.

According to the Governor, the central bank had also said it would keep stakeholders informed of any decision. He described the eventual move as well-thought-out, prudent and calibrated, arguing that it demonstrated the RBI’s ability to remain flexible and data-dependent.

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Strong inflows changed the calculation

The RBI’s decision came as foreign-currency inflows through the facility proved stronger than expected. The FCNR(B) scheme had already attracted $57 billion, while SBI Research estimated that another $25-30 billion could flow in during the remaining days of August, potentially taking total collections to around $85 billion.

Malhotra said policymakers took the decision from a position of strength. The RBI expects the three measures covering FCNR(B) deposits, overseas foreign currency borrowings and external commercial borrowings to attract at least $80 billion into India.

The special window had been introduced when global uncertainty and capital outflows were putting pressure on the rupee. The RBI also relaxed pricing norms to allow banks to offer higher interest rates on eligible FCNR(B) deposits.

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Why continue when marginal benefits are falling?

Malhotra explained that the decision also reflected the economics of continuing the swaps. “There is a diminishing marginal utility of every dollar that is swapped,” he said, while the marginal cost of sterilising those funds for a longer period increases.

The RBI therefore concluded that continuing the facility was becoming less useful as inflows strengthened.

The Governor said the underlying objective had not changed: the facility was intended to attract foreign-currency assets and strengthen India’s external sector. The early closure, he argued, was part of the RBI’s broader external-sector management rather than a reversal of that objective.

The RBI also allowed more than two weeks for stakeholders to make necessary arrangements and benefit from the facility during its remaining period, which Malhotra said was sufficient.

The episode, therefore, highlights the RBI’s balancing act between policy certainty and the flexibility to respond when incoming data changes the assessment.

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