NRIs Brought $52 Billion to India |Why Is RBI Ending Swap Scheme Early? | FCNR(B) |CA Rachana Ranade

[00:00:00] The Indian rupee has been under pressure for a long time. In 2026, the depreciation has become significantly sharper. The rupee has already depreciated by around 9% in 2026 compared with an average annual depreciation of around 3% over the 30-year period from 1995 to 2025.

[00:00:23] And the sharp fall has raised concerns for the government, for the banks and most importantly for RBI. Now because when the rupee falls sharply, it can make imports more expensive, it can increase the pressure on inflation and it can create additional challenges for India's growth.

[00:00:43] So obviously, RBI has been taking several measures to stabilize the rupee and to strengthen India's foreign exchange position. One such measure which has turned out to be a game changer is the FCNRB deposits from NRIs which was announced on 8th of June 2026 with a deadline of 30th September 2026.

[00:01:06] But on 14th August, the RBI announced the RBI announced the new deadline which will be 31st August 2026 in spite of attracting $52.3 billion of inflows between 8th June and 13th August 2026. So why would the RBI ended up in the RBI? So why would the RBI end a scheme prematurely that has successfully attracted more than $52 billion into India?

[00:01:33] But before we get into that, we have to understand what exactly is FCNRB? Why did RBI introduce this swap facility on FCNRB? And why is the central bank that is the RBI now ending it early? There are so many questions to be understood in this video. We are going to go step by step. I am going to go into the shoes of a teacher and help you understand this concept with very nice drawings. So video is going to be extremely informative. Keep on watching the video till then.

[00:02:03] Hey folks, CA Rachana Ranade here and I welcome you all to a very, very educational video. First things first, let's get started with what is FCNRB? FCNRB stands for Foreign Currency Non-Resident Bank Deposit. In simple terms, it essentially is a fixed deposit for NRIs. But instead of being held in Indian rupees, the deposit is held in a foreign currency. Okay, let's take a simple example for this.

[00:02:29] Suppose there is an NRI living in United States and that person has $1 million. Now, instead of converting that $1 million into Indian rupees and putting that money in an NRE or NRO deposit, the NRI can put this into an FCNRB deposit in US dollars. Now, the important point here is that the deposit remains denominated in dollars.

[00:02:52] So, suppose the rupee moves from 90 rupees per dollar to 96 rupees per dollar in this time frame. The NRI does not suffer a rupee depreciation loss on the FCNRB deposit because the deposit continues to remain $1 million plus the dollar interest that he earns on it. Now, this makes the FCNRB deposit particularly attractive for NRIs who want to keep their savings in foreign currency.

[00:03:21] And under the RBI framework, FCNRB deposit can be held in designated foreign currency with a maximum maturity of 5 years. Now, let's understand a very important point that was this concept of FCNRB introduced for the very first time on 8th of June? No, the concept was not new, but the structure was. Under the new structure, banks are now offering interest rates above 6%

[00:03:48] as compared to around 3% earlier. So, is there a massive jump in the interest rate payout? Answer is yes. But the question is that how was this possible? And if you want to know the answer, you need to understand a special US dollar Indian rupee Forex swap facility that was introduced by RBI on the 8th of June. And I think you need to understand this with the help of a very nice example. And for that, let me go into my teaching zone.

[00:04:18] Now, yes, I'm going to go into my teaching zone. But the thing is that the example is so big that if I were to keep on writing every single word, it would have taken a long time. So, I've done my homework. I've already drawn the example for you. And I'm just going to highlight the key points. And I want your maximum attention for next maybe three minutes so that you understand this whole concept very nicely. And now, have a look at this. Now, if you see here what used to happen before the RBI circular. Earlier, what used to happen? You can see an NRI here.

[00:04:48] NRI is a little bit unhappy. Why? Because he is going to deposit 1 lakh agreed. With whom? With the bank. Let's say for a period of five years. Now, what would happen after five years? That person would get five years. After five years, that person would get obviously his principal repayment, which is 1 lakh dollars, plus interest at the rate of 3% per annum. Simple till year. Yes. Now, why would bank give a rate of as low as 3% per annum? For that, we have to understand one very important point.

[00:05:18] Though the person has deposited 1 lakh dollars, what happens is that bank can't just keep that 1 lakh dollars with itself. It will ideally have to convert that dollars into rupees. And ideally, it will lend it to the businessman or individuals in India who want the loan. Correct? So, what would happen? Understand, bank would convert that dollars into rupees. But after five years, bank has to repay that money to the foreigner and to the NRI basically. And again, after five years,

[00:05:47] what would have happened is that the rupee would have depreciated and that would have hit the bank's P&L. So, let's take an example that let's say today, $1 is equal to 90 rupees. After five years, what could happen is $1 may go to 104. I've just considered a 3% depreciation per year, which is like a standard depreciation for Indian rupee over the last almost 20 years. Now, you can imagine that if the bank knows that

[00:06:17] maybe $1 is equal to 104, that is what is going to happen. But what if something happens like what happened in this year? What if the rupee depreciates by more than $3? So, bank wants to be sure that it does not have to face some unexpected shocks. And for that, what bank does is bank hedges its position, hedges its contract with whom? With let's say an investment bank. In simple words,

[00:06:44] bank, this bank and this investment bank enter into a contract with say, that five years later, the investment bank will give back the money to the bank, to this original bank at $1 is equal to 104. And that rate is fixed today. Okay. Now, does bank have a peace of mind that it knows that after five years, it is going to get $1 is equal to 104 exchange rate. Now, let us understand what bank does with that $100,000.

[00:07:13] See, bank will ideally convert the dollars into rupees and will give it to loans. Let's say to businesses, give it as loans to businesses or individuals. And let's say they are lending it at 8% per annum interest. Now, let's understand what was the bank's profit here. Okay. Bank got $1,000. Bank has promised how much? Bank has promised only 3% to the NRI. Bank has lent that money at how much? 8%. So, let's understand.

[00:07:42] Bank lent it at 8%. That is the interest income. What was the hedging cost? Today is 90 rupees per dollar. After five years, they are going to get at 104 rupees per dollar, which is roughly 3% cost. So, their hedging cost is around 3%, which leads to around gross level 5% profitability for the bank. But they also have to pay this 3% per annum. And that is why this will lead to an outflow of 3%.

[00:08:08] And that is the reason why the net interest margin that will remain with the bank is 2%. Simple till here. Yes. From this 2%, they'll have to take out their other expenses. Now, what has happened? This was the before 8th of June scenario. Now, instead of this 3%, bank said we are agreeing to pay you 6% rate of interest. Now, how would that be possible? So, let's understand what is the after scenario. See, NRI is now happy. Earlier, NRI was sad. Why? Only 3% rate of interest.

[00:08:37] Now, NRI is happy. Okay. Because now, NRI is going to give 1 lakh dollars to the bank. Bank has promised that after five years, they will give 1 lakh dollars plus interest at what? 6% per annum. Now, don't you think that what will happen is that they are going to lend it at only 8%. So, 8% they are going to lend this money. 6% is what they have promised. They are remaining with only 2%. How can they bear the hedging cost, which will be around 3%? And that's where RBI has stepped in.

[00:09:07] Now, RBI said that bank, don't worry. We will enter into a swap contract with you. We will enter into a swap with you, which is in simple words like a contract. And RBI has promised the bank that five years later also, we will repay the dollars at the same exchange rate that exists today. So, is that going to take a hit on the bank? No. So, now what is happening is that

[00:09:35] bank is going to lend at 8% to domestic businesses or to individuals at what percent? At 8%. Is there any hedging cost? No. So, gross level, banks are making 8% per annum. What is the interest rate that they have to give? 6% and still the net interest margin is 2% because here is the biggest differentiator, no hedging cost because RBI is bearing that hedging cost. Okay.

[00:10:04] But 1%, I mean, you have two questions, I'm sure. Why is RBI bearing this 3% cost? Is that going to be a big amount? Yes. We are going to understand that later. Why is RBI bearing that cost? But first, let us understand what is the biggest advantage to banks? Because anyways, banks were getting 2% earlier now. Also, they are getting 2%. So, what is the big deal for the banks? Why are banks getting excited? There are two, three important points here. Number one, banks will benefit because there is no CRR or SLR requirement

[00:10:33] on these FCNRB deposits that they are receiving in this window. CRR is around 4.5%. SLR is 18%. So, if I just say 4 plus 18, out of 100 received, 22 they have to keep aside and they can lend only 78. But now, with this new change, whatever 100 is received, they can lend entire 100 and which can increase the profitability for the bank. That's the number one advantage for the bank. Number two is that right now, many banks are struggling to get deposits.

[00:11:03] Now, they are getting deposits, that too, in foreign currency. With this and without any hedging cost. So, can they better their loan to deposit ratio? And answer is again, yes. Plus, there is one more tricky point here that foreign banks, I mean, foreign branches of Indian banks can also offer leverage on these FCNRB deposits. But this is a tricky point. Let's not go into that today. But I hope you have understood what are the two key advantages for the bank. One,

[00:11:32] no CRR SLR on these deposits. And number two, very important, they can better their loan to deposit ratio. I know this chunk, I said maybe three minutes, but I'm sure I have gone past almost seven minutes. But this is the most important point to understand what was the position earlier and what is the position now. Now, let's understand this whole story from the RBI perspective as the grand finale part of the video. Number one, is RBI taking the hit on its own profitability? Answer is yes.

[00:12:02] Now, what will happen is that whatever profit RBI earns, basically it gives a big chunk out of that to the government as dividends. Now, if this currency depreciation is going to be taken as a hit by RBI, can the dividend declared by RBI to the government get reduced to that impact? Answer is possibly yes. Okay, that is the first one. Second point is, why did RBI want to attract more dollars into India? I think you already know the answer. The answer is,

[00:12:32] mota moti, more to stabilize, to strengthen the Indian rupee and provide greater dollar liquidity to meet the country's external payment requirements, such as it could be for imports and other foreign currency obligations. So, second point is also clear. But the third point, the third question is that, why did RBI close this scheme early? Because if RBI wanted to attract foreign currency into India and it has already brought

[00:13:00] more than 52 billion dollars through the FCNRB deposit, what could be the reason for closing this early, almost by a month? The reason might be that the facility had already achieved its objectives much faster than what they expected. RBI originally allowed FCNRB deposits to be mobilized until 30th September, like I told you earlier. But after receiving such a large amount of foreign currency inflows, it decided that there was probably

[00:13:29] no more need to continue the special incentive for another month. And that could be the reason why they brought forward the deadline to 31st August 2026. Now, there is another important consideration, which is that while attracting dollars strengthens India's external position and builds forex liquidity, what could happen is excessively large dollar inflows increase the supply of dollars and demand

[00:13:58] for the Indian rupee can create appreciation pressure on the rupee. Now, a strong rupee, though can make imports cheaper, it also makes the Indian exports relatively expensive for global buyers and it can affect the India's export competitiveness. So, the RBI's decision was probably about balance. It already had attracted a very large amount of money through the FCNRB facility and maybe continuing the incentive

[00:14:27] for a longer period was maybe not necessary as it could have created a greater appreciation pressure on the Indian rupee. I hope you found a lot of value in today's video. This was more of economics and understanding the rupee dollar relation how RBI changed the FCNRB scheme for a brief period of time and how amazing amount of dollars actually flew into India and I hope

[00:14:56] this whole concept was a kind of a new concept for a lot of viewers. If you liked this attempt, please don't forget to smash the like button. Please don't forget to share this video with your friends. I'll see you in the next one. Till then, take care. Jai hin and bye-bye. You might have come across such advertisements on various social media platforms. Please note, all of these are fraudsters promising unbelievable returns through Stock Tips. I don't provide any calls or advisory services. I provide only

[00:15:26] educational content through my social media handles and through my website rachanaranade.com and rachanaranade.in.