The FCNR 7% Dollar Window Closed a Month Early

The Reserve Bank of India closed its special FCNR(B) dollar window on August 31, 2026, a month before the first September 30 deadline. Authorised banks had already raised $65,397 million of those deposits by August 21, according to the central bank’s own table.

The 7% coupon that chased non-resident Indians was never a standing gift. It was the public price of a below-market rupee-dollar swap that overshot, then stopped, and left lenders holding surplus rupees against dollars that must be returned in three to five years.

The Dollar Window Shut on August 31

Governor Sanjay Malhotra announced the package on June 5, 2026, after fresh FCNR(B) inflows had fallen to $946 million in FY26 from $7.08 billion in FY25. He said the bank was hopeful of reasonable inflows and was not targeting any particular amount.

The swap desk opened on June 8. On June 17 the interest-rate ceiling on fresh three-to-five-year FCNR(B) deposits was lifted through September 30, and a June 23 FAQ allowed loans and standby letters of credit against those deposits. An August 14 notice then pulled the FCNR scheme in, and the August 22 data release said it would stay open only till August 31.

THE FCNR SWAP CALENDAR

1. June 5, 2026: Governor Malhotra offers to bear the full hedging cost on fresh three-to-five-year FCNR(B) deposits.
2. June 8, 2026: The US dollar-rupee swap facility starts, with cash-reserve and statutory-liquidity exemptions on eligible deposits.
3. June 17, 2026: The interest-rate ceiling on those tenors is withdrawn through September 30, 2026.
4. August 14, 2026: RBI says the FCNR scheme will run only till August 31.
5. August 31, 2026: New FCNR deposits lose the special swap. External commercial borrowings and overseas foreign-currency borrowings remain eligible through December 31, 2026.

Deposits already booked keep the coupon they locked. New money does not get the same hedge.

How the Swap Paid for 7% Coupons

Banks take dollars from NRIs, persons of Indian origin, and overseas citizens of India, then swap those dollars with RBI at par. They sell dollars to the central bank at the FBIL reference rate and buy the same amount back at the same rate when the deposit matures, in multiples of $1 million, once a week. The second leg is not a market forward. It is a free FX hedge on the principal.

RBI’s FAQ is blunt on the gap that remains: the swap covers only the principal, not the interest. Swaps with the central bank cannot be cancelled even if a customer later breaks the deposit. The underlying deposit has a one-year lock-in; after that a bank may allow an early exit under its own rules, but it still owes RBI the dollars at the original swap rate.

That is why lenders could print 6% to 7.5% in dollars. They were not paying a 3% forward premium out of the coupon. The deposits also sat outside cash-reserve and statutory-liquidity ratios, which bankers put at about 30 basis points of extra room. Loans against the same deposits, including overseas loans with a lien, turned the product into a leveraged book for anyone who could borrow dollars cheaper than the FCNR rate.

Small Finance Banks Stretched Past 7%

Once the ceiling came off, the rate card split by franchise, not by currency. Large private banks clustered at 6%. State Bank of India stayed lower. Small finance banks used the window to buy three-to-five-year dollar funding they cannot raise in wholesale markets.

USD FCNR(B) RATES DURING THE WINDOW

Equitas had first moved three-to-five-year dollar deposits to 7.13% in June, then to 7.52% for larger tickets from June 30. AU Small Finance Bank published a peak USD rate of 7.10% for three to four years, up from 5.15%. Before the window, SBI was quoting 3.05% on five-year FCNR money.

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Mid-June US Treasury notes yielded about 4.16% at three years and 4.26% at five years. Equitas’s 7.52% sat 3.26 percentage points over that five-year yield, in dollars, with no rupee path. The September card at Karur Vysya Bank shows what a posted rate looks like without the swap: a September card at 4.00% on the same three-to-five-year dollar bucket.

RBI Logged $65 Billion by August 21

The official scoreboard moved in two published steps. By July 31, banks had raised $36,725 million of FCNR(B) deposits under the facility, plus $2,575 million of overseas foreign-currency borrowings and $1,516 million of external commercial borrowings, for a total of $40,816 million. Three weeks later the FCNR line was $65,397 million.

RBI SWAP TALLY

• July 31 FCNR: $36,725 million, 53 days after the desk opened.
• August 21 FCNR: $65,397 million, a $28,672 million rise in 21 days.
• August 21 total: $72,848 million including $4,860 million of overseas borrowings and $2,591 million of external commercial loans.
• August 21 reserves: $729,328 million of foreign-exchange reserves in the weekly statistical supplement.

Finance Minister of State Pankaj Chaudhary told the Lok Sabha that outstanding FCNR(B) balances rose from $32.56 billion on June 5 to $60.55 billion on July 30, nearly $28 billion, or 86%. HSBC’s book jumped from $120.26 million to $6.26 billion, a $6.14 billion increase. SBI added $4.12 billion, to $13.82 billion. ICICI Bank added $3.70 billion, to $6.06 billion. Private banks took $10.73 billion of the scheme flows, public banks $8.84 billion, and foreign banks $8.37 billion.

HSBC’s move from a thin book to $6.26 billion in eight weeks is the leverage story in one line. Retail NRI savings do not re-rate that fast. Loans against FCNR deposits, which RBI explicitly allowed, do.

WHAT WE KNOW

• Official close: The FCNR scheme under the swap was open till August 31, 2026.
• Last RBI table: $65,397 million of FCNR deposits had come in by August 21, out of $72,848 million across the three channels.
• Still open: The borrowing and external-loan legs of the same swap remain eligible through December 31, 2026.

WHAT IS UNCONFIRMED

• Final FCNR print: Deepak Shenoy, chief executive of Capitalmind Mutual Fund, put the FCNR swap at $127 billion in early September, with another $9 billion from borrowing swaps, a $136 billion combined figure that has not appeared in an RBI table opened for this article.
• Unlevered share: No official split has been published between plain NRI savings and deposits backed by loans or standby letters of credit.

Prasanna Tantri, associate professor of finance at the Indian School of Business, treated the combined $136 billion as borrowed dollars that must leave on a known timetable. That is the right way to read even the smaller official number. These are liabilities with a maturity, not grants.

Raghuram Rajan’s 2013 Swap Still Sets the Bar

The last time India ran this machine was September 2013. Raghuram Rajan, on his first day as governor, opened a dollar-rupee swap for fresh FCNR(B) money of three years and more, at a fixed 3.5% a year, from September 10 to November 30. The two swap windows that autumn, deposits plus overseas borrowing, raised about $34 billion.

The 2026 design is more aggressive on price. In 2013 banks still paid 3.5% for the hedge. This time the swap is at par, so the entire forward premium, which bankers put around 3% a year in June, sits on RBI’s book. The 2026 window also dropped the rate ceiling and let banks lend against the same deposits.

TWO SWAP WINDOWS

SBI Research had said before the book built that inflows could exceed the 2013 haul. The August 21 table was already past $34 billion on FCNR alone. The early close is the tell that the desk got more dollars than the June statement asked for.

Surplus Rupees Are the Hangover

When a bank sells dollars to RBI, it receives rupees. Multiply that by tens of billions and the domestic money market is suddenly long cash. Shenoy put the excess at nearly 8 lakh crore parked in reverse repos on September 2, with the rupee at 94.73 against the dollar, and warned that the stock has to be managed in a high-credit-growth year or it feeds inflation with a lag.

The excess liquidity in the system is nearly 8 lakh crore yesterday, parked in rev repos. This is pretty large, and will need to be managed carefully in a high credit growth environment otherwise it will cause inflation.

Deepak Shenoy, CEO, Capitalmind Mutual Fund

He also defended the leverage structure as a loan against a fixed deposit, provided dollar borrowing costs sit below the FCNR rate and tenors match. The objection that remains is simpler than the structure: the dollars are owed back, with interest, in a tight three-to-five-year cluster. A calm maturity wall is a refinancing event. A bad year in oil or geopolitics turns the same wall into a test of the rupee.

Tantri’s other point is quality. Some of the FCNR money may have replaced ordinary remittances that would have stayed as equity, housing, or unrequited transfers. If that substitution is large, India swapped a stable inflow for a dated liability and called it a reserve build.

Deposit Insurance Stops at ₹5 Lakh

Interest on FCNR(B) is tax-free in India and fully repatriable. It is still taxable in the country where the depositor is resident. US persons, in particular, do not escape federal income tax because Mumbai does not withhold.

The deposit is a claim on an Indian bank, not on the US Treasury. Deposit Insurance and Credit Guarantee Corporation cover includes FCNR balances, but only up to ₹5 lakh per depositor per bank, in rupees. That is a rounding error on a $100,000 ticket, which is why the 7.52% small-finance-bank print and the 6% HDFC print are not the same product once the coupon is set aside.

WHAT STILL APPLIES AFTER AUGUST 31

• Booked deposits: Coupons and the RBI swap on eligible money already taken stay in place for the original tenor.
• New FCNR money: Banks can still take FCNR(B) deposits, but without the special at-par hedge, posted rates have already moved back toward 4% at Karur Vysya Bank.
• Other swap legs: External commercial borrowings and overseas foreign-currency borrowings under the June 8 facility remain open through December 31, 2026.
• NRE rupee deposits: They remain tax-free in India and fully repatriable, and they still carry rupee risk that FCNR was built to avoid.

NRE fixed deposits convert foreign currency into rupees on day one. Advisers who compared the two products during the window treated FCNR as the cleaner dollar hedge and told clients not to break existing NRE deposits, because penalties and the spot conversion would lock in a rupee loss. That advice survives the close. The 7% dollar print does not, except on money that was already in.

Frequently Asked Questions

What is an FCNR(B) deposit?

It is a term deposit an NRI, OCI, or PIO holds with an Indian bank in a freely convertible currency, commonly the US dollar, pound, euro, yen, Canadian dollar, Australian dollar, or Singapore dollar. Principal and interest are paid back in the same currency, so there is no rupee conversion at maturity. RBI’s 2026 swap with banks was in US dollars only, even when the customer deposit was in another currency.

Is FCNR interest taxable in India?

No. Interest on FCNR(B) is exempt from Indian income tax and can be remitted abroad. RBI rules count the year as 360 days and compound interest every 180 days, which is why a quoted 7.52% does not match a simple 365-day annual percentage yield. The exemption does not cover tax in the depositor’s country of residence.

Does DICGC insurance cover FCNR deposits?

Yes, FCNR balances at member banks sit inside the same ₹5 lakh cap per depositor per bank as domestic savings and rupee fixed deposits. The cap is rupees, not dollars, and it does not rise because the account is foreign-currency. Amounts above that line are unsecured claims on the bank.

Can you withdraw an FCNR deposit before maturity?

Banks must allow premature withdrawal on request, but no interest is paid if the deposit is broken before one year, and a penalty of 1% or swap cost, whichever is higher, can apply after that. Deposits taken under the 2026 swap also carried a one-year lock-in, and the bank’s swap with RBI still cannot be cancelled if the customer leaves early.

What is the difference between an NRE FD and an FCNR(B) deposit?

Both are tax-free in India and fully repatriable. An NRE deposit is rupees, so the dollar value moves with the exchange rate; the rupee has lost about 4 to 4.5% a year against the dollar since 1991, which can wipe most of a 7% rupee coupon in dollar terms. FCNR(B) stays in foreign currency from start to finish.

When did the 2026 RBI FCNR swap window close?

New FCNR(B) deposits lost the special at-par hedge after August 31, 2026, following an August 14 notice that shortened the original September 30 deposit deadline. Banks can still complete swaps through the original operations window for money already taken. The ECB and overseas-borrowing legs of the same June 8 facility run through December 31, 2026.

Money that made the August 31 cut keeps its dollar coupon for three to five years, and RBI still owes those dollars back at the original swap rate. Fresh FCNR cash now prices without that hedge, which is why a 4% September card is a more honest picture of the product than a 7% June poster.

Disclaimer: This article is news reporting and analysis of RBI’s 2026 FCNR(B) swap window and related bank deposit rates, and it is for information only. It is not investment, tax, or legal advice, and it is not a recommendation to open, break, or roll any FCNR, NRE, or other deposit, or to use loans or standby letters of credit against those deposits. Readers should consult a qualified cross-border tax adviser and, where needed, a registered investment adviser in their country of residence before moving funds. Interest rates, insurance cover, tax treatment, and the status of RBI facilities reflect the circulars, rate cards, and statements cited here and can change.