Foreign Currency Non-Resident (Bank), or FCNR(B), deposits have emerged as a major source of foreign-currency funding for Indian banks, following the Reserve Bank of India’s special USD-INR swap facility launched in June 2026. The scheme attracted an unusually strong response from overseas Indians, giving banks access to a large pool of longer-term foreign-currency deposits while also helping strengthen liquidity across the financial system.
The scale of the inflows has been much larger than initially expected. By August 31, FCNR(B) deposits mobilised under the special facility had reached about $127.2 billion, while total inflows through FCNR(B), overseas foreign-currency borrowings and external commercial borrowings stood at approximately $136.4 billion.
RBI scheme gives banks access to foreign-currency funding
The RBI introduced the special USD-INR swap facility on June 8 as part of measures aimed at increasing foreign-exchange inflows and strengthening India’s balance of payments. Under the facility, banks could raise FCNR(B) deposits from non-resident customers and swap the foreign currency with the RBI at the prevailing spot rate.
The RBI provided the foreign currency back to banks at maturity under a concessional arrangement, significantly reducing the cost and currency risk associated with attracting overseas deposits.
The response was rapid. As of August 21, FCNR(B) deposits had already contributed $65.4 billion out of the $72.85 billion raised through all three channels covered by the swap facility. FCNR(B) therefore accounted for almost 90% of the inflows at that stage.
Banks can replace expensive sources of funding
One of the biggest benefits for Indian banks is that FCNR(B) deposits can reduce their dependence on relatively expensive domestic funding sources.
Banks have traditionally relied on bulk deposits and certificates of deposit (CDs) to meet funding requirements when deposit growth does not keep pace with credit demand. These sources can carry higher interest costs, particularly when banks compete aggressively for deposits.
The large FCNR(B) inflows have changed that equation. With more foreign-currency funding available, banks have been able to reduce their reliance on short-term wholesale funding.
System liquidity reached around ₹7.7 lakh crore recently, compared with ₹1.07 lakh crore in July on an average basis, according to RBI data cited by the Financial Express. Banks have also been using the additional liquidity to replace high-cost bulk deposits and CDs.
Three-month certificate-of-deposit rates have fallen sharply as banks have had less need to raise expensive short-term funds. This could eventually reduce banks’ overall cost of funds.
ICICI Bank shows how the money is being used
The impact can be seen clearly in the case of ICICI Bank.
ICICI Bank mobilised around $17.88 billion through FCNR(B) deposits under the RBI’s special swap facility by August 31. Of this amount, about $9 billion had been deployed as loans through its international branches and subsidiaries.
The bank also issued standby letters of credit worth approximately $3.63 billion to other banks in connection with loans extended against these deposits. Together, direct loans and lending supported through these guarantees amounted to more than 70% of the FCNR(B) deposits mobilised by ICICI Bank.
This demonstrates that the deposits are not simply sitting within the banking system. A significant portion is already being connected to lending and other banking activities.
SBI and other banks also benefit
Large banks with extensive overseas networks have been among the major beneficiaries of the programme.
State Bank of India had earlier said it expected to mobilise around $10 billion through FCNR(B) deposits. The bank indicated that much of the money would initially be used to replace high-cost bulk deposits rather than immediately finance additional lending.
This approach can still support credit growth indirectly. By replacing expensive deposits, banks can lower their funding costs and create more room to price loans competitively.
Analysts have also said that large private-sector banks, public-sector banks and foreign banks are likely to benefit more because of their stronger international franchises and distribution networks.
The RBI also gains stronger foreign-exchange buffers
The FCNR(B) programme has provided benefits beyond individual banks.
The massive foreign-currency inflows helped India’s foreign-exchange reserves reach a record $729.33 billion as of August 21. Reuters reported that India’s reserves had risen by about $63 billion over eight consecutive weeks, with the RBI’s measures to attract foreign currency playing an important role.
The inflows also give the RBI greater flexibility in managing periods of pressure on the rupee. The central bank can use its foreign-exchange resources to smooth excessive currency volatility while allowing market forces to determine the broader direction of the rupee.
Funding benefits come with margin pressure
The FCNR(B) inflows are positive for bank liquidity, but they are not entirely cost-free.
The sudden availability of large amounts of foreign-currency funding can put pressure on banks’ net interest margins (NIMs), particularly if banks offer attractive rates to bring in deposits but cannot immediately deploy all the funds at sufficiently high returns.
Banks have also started cutting FCNR(B) deposit rates after the special mobilisation window ended. For example, HDFC Bank reduced its five-year US-dollar FCNR(B) rate to 3.15% from 6.25%, effective September 1. Other major lenders have also reduced rates.
The RBI closed the FCNR(B) mobilisation window on August 31, a month earlier than originally planned, after the response exceeded expectations. The swap facility for eligible deposits already mobilised remains available until September 11, while the ECB and OFCB components continue until December 31, 2026.
The immediate effect of the FCNR(B) programme is therefore clear: Indian banks have gained access to a huge pool of foreign-currency funding, while the wider banking system has received a substantial liquidity boost. The next question is how effectively banks can deploy those funds and convert the temporary funding advantage into sustainable credit growth and stronger profitability.
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