Ajit Ranade: RBI owes the public an explanation for its exorbitant dollar deposit scheme

Much has already been said about the Reserve Bank of India's (RBI) abrupt closure of its special foreign currency non-resident (bank) scheme, a facility to attract dollar deposits from overseas Indians, barely weeks after RBI's near-assurance that it would run its full course until 30 September. The FCNR(B) window was shut a month ahead of schedule, with no convincing explanation offered. Rather than revisit that controversy, this column asks a different question: what will the scheme actually cost? To be fair, RBI was not operating in a vacuum. India's balance of payments has been under genuine stress. Net foreign direct investment has collapsed from $44 billion in 2020-21 to virtually zero. Foreign portfolio investors pulled out nearly $29 billion from Indian markets in 2026 alone, on top of $18 billion the previous year. The rupee was weakening fast. The central bank needed to act, and an FCNR(B) swap window, under which RBI absorbs the currency hedging cost for banks accepting dollar deposits, was a tested instrument. It had worked in 2013 under RBI's then governor Raghuram Rajan during the 'fragile five' crisis. But 2026 is not 2013. Back then, India's current account deficit was nearly 5% of GDP, inflation was in double digits, growth was faltering, and global markets had clearly lost confidence in India. So the FCNR(B) scheme of 2013 was emergency surgery for a patient in intensive care, and it raised a modest $34 billion. Today, GDP growth is 7%, inflation is within RBI's target band of 2-6%, and the country's current account deficit is a manageable 1% to 1.5% of GDP. The patient had a fever, not a cardiac arrest. Yet, the medicine reached for ended up at four times the 2013 dose. The scheme attracted a staggering $127 billion in deposits. It is also a far more expensive medicine. In 2013, global interest rates were near-zero and the US 10-year Treasury bond yielded about 2.5%. Hedging costs were low. Today, the US 10-year yield is close to 5% and Japanese rates are at decadal highs. The three-year forward premium for the dollar against the rupee is about 6%. Apply that to $127 billion and the notional cost of the exchange rate guarantee RBI has provided comes to roughly $8 billion, or more than ₹75,000 crore. RBI will not actually buy forward cover in the market. It will simply bear the risk on its own balance sheet. If the rupee depreciates over the next three to five years, it pays the difference. If it appreciates, say to ₹92, RBI makes a gain of perhaps ₹40,000 crore. The potential loss is roughly double the potential gain, and that too in a volatile world. That is not the only cost. The $127 billion came in because RBI's subsidy allowed banks to offer FCNR(B) rates of 6% to 6.3%, about 300 basis points above normal. The moment the swap window closed, banks slashed the rates back to about 3%. That 300-basis-point premium paid by banks to depositors will ultimately be borne by borrowers and shareholders. Then there is the liquidity problem. These dollar inflows, converted to rupees, have contributed to a record surplus of close to ₹10 trillion in the banking system. To prevent this from fuelling inflation or reckless lending, RBI must mop it up by selling government bonds. That pushes bond prices down and yields up, raising the government's own borrowing costs, of which the interest cost is already at a staggering 40% of all revenues. One intervention begets another, each with its own price tag. And what did we get for all this? The rupee strengthened by about two to three rupees against the dollar. A poor return on an $8 billion exposure, though RBI has more reserves to use too. There is a bigger concern. Unlike China, Korea or Japan, whose reserves are largely earned through persistent export surpluses, India's FCNR(B) inflows are borrowed dollars. They carry a return obligation (principal, interest and an exchange rate guarantee) and must be repaid in three to five years. These are liabilities dressed up as reserves. With guaranteed 7% dollar returns and zero currency risk, one must also ask: how much of this inflow represents actual NRI savings and how much of it is Indian capital round-tripping through Dubai or Singapore to capture risk-free arbitrage? Finally, a question of governance. Every rupee the government spends requires parliamentary approval through the budget process. Yet, here a potential liability of ₹80,000 crore has been created through an administrative circular, with no legislative debate. RBI's annual surplus transfer to the government is roughly ₹3 trillion, equivalent to about 8% of all central government revenues. This is a vital fiscal resource, although using RBI surpluses as a fiscal stabilizer is problematic in itself. If FCNR(B) losses erode that surplus, the Centre's fiscal deficit widens or spending gets cut. Either way, the taxpayer pays. This is precisely the kind of quasi-fiscal operation that blurs the line between monetary policy and fiscal management, a line that must remain sharp if both the central bank's credibility and the government's fiscal discipline are to be preserved. The point is not to question RBI's intentions. Central banking in turbulent times demands difficult choices made under uncertainty. However, good institutions earn trust not by pretending they never change course, but by explaining why they did, and at what cost, with greater transparency. On the FCNR(B) scheme, RBI owes the public an account of its actions. The author is senior fellow with Pune International Centre