The rupee recovered by 0.9 per cent on Friday, after supportive measures from the government and the RBI. While the government passed an ordinance exempting FIIs from tax on income from government securities (G-Secs), the RBI announced a suite of measures to alleviate India’s balance of payments (BoP) challenge. The key among them involves an FCNR swap window, mirroring a similar measure in 2013, when Raghuram Rajan was the then Governor. Rajan would then go on to admit in a 2016 event on how he initially viewed the idea as ‘idiotic’ and changed his stance, subsequently realising its benefits.

What is the FCNR swap window? Will the magic work this time too? Here’s an explainer.

What is the RBI’s measure involving FCNR (B) deposits to garner forex inflows?

FCNR (B) deposits or Foreign Currency Non-Resident (Bank) deposits are term deposits that NRIs (non-resident Indians), OCIs (overseas citizens of India) and PIOs (persons of Indian origin) can open with Indian commercial banks, like SBI. Under these accounts, both the deposit of principal and redemption happen in foreign currency — thus, the depositor is safeguarded against depreciation of the rupee. On top of this, the interest on these accounts is exempt from tax in India.

That said, the central bank has now announced a facility where it will bear the hedging cost with respect to FCNR (B) deposits raised by AD (authorised dealer) banks up to September 30, on behalf of such banks. An important condition is that the tenor on these deposits must be three-five years. AD banks are, basically, Indian commercial banks that are licenced by the RBI to deal in forex. The list includes major public and private sector banks.

How does the facility work?

Since Indian banks lend in rupees, they have no use having the FCNR deposits in foreign currency, unless they can find lending opportunities in those currencies. Hence, once raised, they convert them to rupees. Since upon maturity, deposits are to be redeemed in foreign currency, banks must convert rupees back to foreign currency. In the intermittent period, they are exposed to fluctuations in the currency market. To hedge themselves from this currency risk, banks generally enter into swap contracts (co-terminus with the maturity of these deposits) to lock-in a forward exchange rate, as immediately as raising those deposits. Come redemption, this forward rate is the rate at which banks would convert rupees back to foreign currency, to repay the depositor.

While doing so, banks incur a hedging cost. This will be on top of the interest rate banks promise to pay the depositor. Such hedging cost is exactly what the RBI is offering to bear on behalf of AD banks. Per Anshul Chandak, Head of Treasury at RBL Bank, this is expected to cost the central bank 3.5-3.75 per cent per annum on every billion-dollar raised via the FCNR (B) route—roughly translating to $34 million or ₹325 crore per billion dollars (at today’s exchange rate).

Had it not been for this facility, SBI, for instance, would have roughly incurred 7.1 per cent per annum on a three-year USD FCNR (B) deposit — interest rate of 3.6 per cent plus hedge cost of 3.5 per cent. Now that it can avail RBI’s facility, its cost would be reduced to just the interest rate of 3.6 per cent on the deposit.

What are the historical precedents?

In 2013, during the infamous Taper Tantrum—when the then Fed Chair Ben Bernanke hinted that the US Fed would soon begin reducing or ‘tapering’ post-2008 bond-buying or quantitative easing, rupee was under serious pressure. Rupee depreciated by a massive 29 per cent in merely a span of four months between May and August of 2013 (from ₹54 a dollar to ₹69), grouping India amongst the ‘fragile five’ economies then. India was already struggling from two years of sharp current account deficits of 4.3 per cent and 4.7 per cent for FY12 and FY13 respectively. Balance of payments (which includes both current and capital account) recorded a deficit of 0.7 per cent of GDP in FY12 and marginally broke even at 0.2 per cent of GDP in FY13. The situation called for immediate action to save the currency.

When Rajan succeeded Duvvuri Subbarao as the Governor of RBI in September 2013, the central bank announced a similar swap window for FCNR (B) deposits. The RBI offered banks to swap fresh FCNR (B) dollar funds, raised for a minimum tenor of three years at a concessional fixed rate of 3.5 per cent. This was roughly half of what it would have costed banks to hedge the risk at that time — 7 per cent vs 3.5-3.75 per cent now.

Did the 2013 swap window work?

It did! Reportedly, banks mobilised about $30 billion of much-needed forex when the window was kept open until November 30, 2013. Going by RBI’s BoP data, net non-resident deposits (FCNR (B) plus other NR deposits) recorded a sharp spike to $39 billion in FY14, which was merely $7.4 billion on average in the past five years (FY09-13). The rupee appreciated to ₹62 to the dollar from the bottom of ₹69 by August-end. BoP recorded a surplus of 0.8 per cent of GDP for FY14.

It is interesting to note how this window immensely benefited NRIs, who borrowed dollars at near-zero rates in developed markets and invested in such FCNR (B) deposits, against the collateral of the very FCNR deposits themselves. Here is an excerpt from former SEBI whole-time member Ananth Narayan’s blog on how the scheme operated for some NRIs.

“Consider a Singapore-based NRI with $100,000 to deposit. The proposal her bank would have shown her in late 2013 would have looked somewhat like this:

Start with your original $100,000.

Borrow an additional $900,000 from the bank in Singapore for three years, at 2 per cent per annum.

Place the entire $1,000,000 as a three-year FCNR deposit in Mumbai at 3 per cent per annum and put this up as collateral against your $900,000-loan.

On redemption of the FCNR deposit, pay back the $900,000-loan, and take back your net $100,000 principal.

Each year, you would earn an interest of $30,000 (3 per cent on $1,000,000).

Each year, you would pay an interest of $18,000 (2 per cent on $900,000).

On a net basis therefore, each year, you would earn a net interest of $12,000 – or 12 per cent on your original $100,000!”

Here’s an interesting tidbit. Though markets celebrated Rajan for this idea, the former Governor later admitted that it was, in fact, not his and how he was not in favour of it initially. Before his central bank stint as Governor, he was serving as an officer on special duty, under Subbarao. Among the many ideas the central bank officials had floated to prop the rupee, Rajan found the idea about the FCNR swap window ‘completely idiotic’. His rationale being that the government would have to foot the ₹10,000-20,000 crore swap subsidy bill. With Rajan in the ‘nay’ camp, he found Subbarao, the deputy governors and even the Finance Ministry in the ‘aye’ camp.

However, he later found merit in the idea — that a stronger rupee as a result of FCNR inflows can save up to ₹1.6 trillion on India’s $400-billion import bill. Subbarao would then go on to let Rajan announce the swap facility himself, the very day he took over as the Governor.

Will the same measure work this time around?

While the pressure on the rupee is similar to that of 2013, things are a bit different now. Primarily, while yields in the developed markets were close to zero then — conducive for non-residents to borrow and invest or even just invest their own savings, it is not so now. Yield on three-year US Treasury bonds are anyway elevated at around 4.2 per cent, while that on SBI’s FCNR (B)s is 3.6 per cent. Some banks in the US are already offering up to 4.2-4.35 per cent on USD deposits. Hence, for the window to work this time, it largely hinges on how much Indian banks can pass the benefit on to the depositors, as explained above. This is also the expectation of the central bank, as stated by Governor Malhotra in the post-monetary policy press conference.

Published on June 6, 2026