FCNR(B) Deposits Rise, Forex Reserves Hit Record

India’s foreign exchange reserves hit a fresh high of $729.33 billion for the week ended Aug. 21, driven largely by a surge in FCNR(B) deposits under the central bank’s concessional swap window.

Deposit inflow fuels reserve build‑up

The reserve stock rose by $12.42 billion from the previous week’s level of $716.91 billion. A key catalyst was the special swap facility that let banks attract foreign‑currency funds from non‑resident Indians at rates up to 7.4 %. Between early June and Aug. 21, the deposits added $65.4 billion to the pool.

At the end of May, the outstanding balance of those accounts stood at $34.04 billion.

Banking institutions also tapped the window to raise $4.86 billion through overseas foreign‑currency borrowings and $2.59 billion via external commercial borrowings, further expanding the foreign‑currency base available for market operations.

Effect on the rupee and policy space

The added dollars give the central bank more room to intervene in the currency market, helping to curb sharp rupee moves. The rupee has stayed near 97 per U.S. dollar since mid‑May, still about 8 % weaker than a year earlier, as foreign portfolio investors pulled roughly $19 billion in 2025 and another $24 billion in early 2026.

Because the inflow is deposit‑driven rather than trade‑driven, analysts note that the reserve surge does not signal a lasting improvement in the current‑account balance. It does, however, provide a buffer against external shocks such as oil‑price spikes or geopolitical tensions that could otherwise strain import financing.

One economist explained that the central bank absorbed part of the inflow through discounted foreign‑exchange swaps, preventing an abrupt rupee appreciation that could hurt export competitiveness.

The facility’s attractiveness may wane once the incentive rates are withdrawn, and shifting global yields could reverse the flow. If that happens, the external liability side of the balance sheet would shrink, potentially limiting the bank’s ability to support the rupee without tapping other reserves.

From a broader perspective, the episode illustrates how targeted financial tools can temporarily shore up a country’s foreign‑currency position without addressing deeper structural issues such as oil import dependence. While the reserve cushion improves short‑term stability, long‑term resilience still hinges on diversifying the trade mix and managing external debt.

In the meantime, the central bank’s enhanced reserve level strengthens its credibility with global investors, signaling that it can meet import needs even amid volatile energy markets.

Officials said the reserve record reflects an “exceptional inflow episode” rather than a permanent shift in the balance of payments. They added that the bank will continue monitoring the situation and adjust policy tools as needed to maintain orderly market conditions.