RBI's early FCNR(B) deposit scheme closure 'data-driven' or a policy U-turn? Governor Malhotra explains

Reserve Bank of India (RBI) Governor Sanjay Malhotra asserted that the decision to advance the closure of Foreign Currency Non-Resident (Bank), or FCNR(B) deposit scheme by a month was 'data-driven and caliberated'.

In an interview with the Financial Express, he said that it will not be correct to call it a U-turn; it is rather a calibration as the move demonstrated the central bank’s ability to remain flexible and data-dependent amid rapidly changing conditions.

Defending the central bank's decision, Malhotra described it as a well-thought-out, calibrated, prudent and data-driven response to evolving conditions.


Also read: RBI to close FCNR(B) forex swap facility early after strong dollar inflow

The announcement came on August 14, almost two weeks after the Monetary Policy Committee (MPC) meeting where the central bank governor had ruled out an early closure.

"We have got robust flows as mentioned, and we do hope to get good healthy close going forward. As of now, there is no proposal under consideration to close the scheme prematurely," Malhotra had said at the post-policy press conference.

Responding to criticism over the remarks, he told FE RBI was still assessing a situation that was evolving rapidly.

“I would like to highlight the use of the words ‘as of now’ when I mentioned that there was no proposal to advance the last date,” he said, adding that the central bank had also said it would keep stakeholders informed of any decision, clearly indicating that an early closure had not been ruled out.

According to Malhotra, the policymakers took the decision from a position of strength.

$80 billion forex overhaul

The RBI expects the three schemes—FCNR(B), overseas foreign currency borrowings (OFCBs) and external commercial borrowings (ECBs) to attract at least $80 billion to India's pocket. This policy plan reflects the country’s strong macroeconomic fundamentals and would further strengthen its balance of payments, he told the publication.

The central bank introduced the special window after global uncertainty and capital outflows pressurised the rupee. Besides the swap facility, it also relaxed pricing norms, allowing banks to offer higher interest rates on eligible FCNR(B) deposits. Several lenders, including Indian Bank, HDFC Bank and ICICI Bank, have since raised FCNR(B) deposit rates to attract more NRI money.

Also read: Will FCNR (B) deposit scheme end? RBI Governor said this at MPC

Unveiling the NRI deposits scheme, the RBI had previously said the measures are aimed at encouraging durable foreign currency inflows rather than short-term capital, with the FCNR(B) deposits carrying a mandatory one-year lock-in under the special facility.

The RBI later announced advance withdrawal of the scheme citing stronger than expected dollar inflows.

“There is a diminishing marginal utility of every dollar that is swapped. At the same time, there is an increasing marginal cost because you need to sterilise it for a longer period,” Malhotra said.

The central bank allowed more than two weeks time to stakeholders to make the necessary arrangements and benefit from the scheme during the remaining period, which the RBI considered sufficient, he said on concerns around the sudden nature of the announcement.

Malhotra further added that the decision to close the temporary facility early was part of the RBI’s external-sector management. Though, the underlying objective of the facility—to attract foreign currency assets and strengthen the external sector—remained unchanged.

Also read: RBI’s FCNR U-turn dents policy certainty

How will the NRI deposits appear in RBI balance sheet?

According to RBI Governor Malhotra, the foreign currency assets received through the swaps would appear as foreign currency assets, swelling the central bank’s balance sheet. Further, the outstanding forward leg would be displayed as a contingent liability and remain an off-balance-sheet item.

A report by SBI Research expects India's balance of payments (BoP) to post a surplus of around USD 50 billion in FY27, with the current account deficit (CAD) likely to remain contained at 1 per cent of GDP, as strong foreign currency inflows improve the country's external position.

RBI's FCNR(B) deposit mobilisation scheme has already attracted USD 57 billion in inflows, while another USD 25-30 billion could flow in during the remaining days of August, taking total collections to around USD 85 billion, the report edtimated.

Speaking about the rupee and the RBI’s record net short forward-dollar position, Malhotra said the position remained “very manageable”, and was was primarily the result of swaps previously undertaken to infuse liquidity and the latest facilities intended to strengthen the balance-of-payments position.

“The exchange rate continues to be market determined. Our policy on intervention remains the same, which is to curb excessive volatility and any undue speculative activity,” he said, emphasising that the RBI remained committed to ensuring orderly financial conditions and orderly movements in the exchange rate.