RBI Governor Sanjay Malhotra states that Indian currency deposits will bring additional income to the central bank

The Chairman of the State Bank of India (SBI), C.S. Sethi, stated that funds attracted through non-resident foreign currency deposits (FCNR(B)) will be distributed by banks over three to four months, and this is unlikely to trigger 'abnormal lending.'

Sethi's comments came as banks attracted more funds through FCNR(B) deposits than expected, raising concerns about a potential sharp increase in bank lending.

Sethi clarified that placing this liquidity would require about three to four months, although he did not disclose the exact amount SBI attracted through FCNR(B). The bank had set a target of nearly $10 billion.

Inflows through the Reserve Bank of India's (RBI) preferential swap mechanism reached $136.4 billion by August 31. Meanwhile, banks attracted $127.2 billion in FCNR(B) deposits, significantly exceeding late market forecasts of $90–$100 billion.

The window for FCNR(B) closed on August 31. The RBI launched the preferential swap mechanism for new FCNR(B) deposits, Foreign Currency Bonds (OFCB), and External Commercial Borrowings (ECB) on June 8. The initial validity period for the FCNR(B) window was set for September 30, 2026, but the central bank shortened it by one month after receiving a strong response.

Higher-than-expected FCNR(B) inflows raised systemic liquidity to almost 10.5 trillion rupees as of September 9. According to industry experts, banks have three main ways to use these funds: investing in five-year government bonds, substituting expensive deposits, or lending to companies. However, given the already strong growth in lending, especially in the corporate sector, there are concerns about how much more banks can provide.

Meanwhile, Sethi emphasized that the high initial cost of implementing agentic artificial intelligence (AI) should significantly decrease if this technology is to be scaled in India. He noted the need for scalable and cost-effective AI and computing models.

The Reserve Bank of India's (RBI) initiative to attract dollars from Non-Resident Indians (NRIs) proved significantly more successful than expected. Thanks to foreign currency deposits for non-residents (banking, FCNR(B)), over $100 billion flowed into India by August 31, 2026. Given the rapid inflow of funds, the RBI closed the special forex service window earlier than planned, approximately one month ahead of schedule.

This swift influx of dollars allowed India's foreign exchange reserves to reach a record high. As of August 21, the country's foreign exchange reserves stood at $729.3 billion, compared to approximately $682 billion just a few weeks prior on July 24.

This move by the RBI was made during a period when military actions in the Middle East and fluctuations in crude oil prices were putting pressure on India's external account and the rupee. According to reports, following the start of the conflict between the US and Iran in February this year, India's foreign exchange reserves had decreased by about $46 billion. While reserves were around $682 billion on July 24, the rupee had weakened by about 6% against the US dollar. In this environment, the RBI adopted a strategy to encourage FCNR(B) deposits to attract foreign currency from NRIs.

An FCNR(B) account is a term deposit for NRIs. It allows expatriates to place their foreign income in foreign currency directly in India, without the need for prior conversion into Indian rupees. The feature of this account is that both the principal amount and the accrued interest are returned in the same foreign currency, relieving NRIs of the risk of rupee fluctuations.

Previously, the inflow of funds through FCNR(B) deposits had slowed down. In the fiscal year 2024-25, over $7 billion arrived through this channel, but in FY26, this amount dropped to only $946 million. To stimulate the return of funds, the RBI announced a special forex service in June 2026. This system offered banks preferential forex services for new FCNR(B) deposits ranging from 3 to 5 years, with the RBI covering hedging costs. The goal was to make the option of depositing foreign currency in India more attractive to NRIs.

Initially, RBI Governor Sanjay Malhotra expected an inflow of around $80 billion. However, the pace of fund arrival turned out to be significantly higher than projected. By early August, about $40.8 billion had been received, and by August 31, the amount received through FCNR(B) exceeded the $100 billion mark. Considering such a rapid inflow, the RBI did not wait for the scheduled date of September 30, 2026, and closed the special forex service window about a month early.

The inflow of these dollars also reflected in India's foreign exchange reserves. According to Reuters, as of August 21, India's foreign exchange reserves rose to a record $729.3 billion, up from approximately $682 billion on July 24. Such a large foreign exchange buffer can help finance India's current account deficit and manage external shocks. The rupee also saw some relief. According to a Bloomberg report, on September 1, the rupee strengthened by 0.4%, reaching 94.7988 per dollar, which was the strongest level for the rupee since July 1. During this period, the RBI was also selling dollars in offshore and onshore markets.

The RBI has previously attracted dollars from NRIs under difficult economic conditions. Foreign currency resources from expatriates were utilized during the balance of payments crisis in 1991. Later, in 2013, when pressure on the rupee intensified, about $34 billion was attracted. The inflow of over $100 billion in foreign currency demonstrates that NRI deposits can become an important source of foreign currency attraction for India during crises.