RBI cuts FCNR(B) swap deadline to August 31, banks scramble

The Reserve Bank of India has shortened the deadline for its special FCNR(B) deposit swap facility to August 31 from September 30, citing an encouraging response that saw forex inflows of $52.3 billion as of August 13. The scheme, introduced on June 8, allows NRIs to hold deposits in foreign currencies without INR exposure, with interest typically exempt from Indian income tax. Livemint reports that the early closure compresses transactions banks had expected to execute over a longer period, leaving lenders scrambling to raise funds before the window shuts.

ICICI Bank, Kotak Mahindra Bank and IDFC First Bank have tapped the offshore market since the closure announcement. Treasury officials quoted by Livemint warn of deployment challenges: banks that have raised billions of dollars may struggle to lend immediately and could face negative carry if deposit costs exceed investment returns. Government bond yields have risen, with the 10-year benchmark up 5 basis points to 6.82%. However, RBI governor Sanjay Malhotra told Financial Express he expects at least $80 billion through a mix of FCNR, ECB and OFCB instruments.

Ankur Choudhary, CEO of Belong, told Livemint the window is relevant for NRIs seeking higher foreign currency returns but comes with a 3-5 year lock-in and potential penalties for premature withdrawal. Regular FCNR(B) deposits remain available after August 31, though interest rates are likely to fall once the special swap facility ends. The RBI has not responded to queries about the early closure.