Discuss the role of NRI deposit schemes like FCNR(B) in managing exchange rate volatility. Are debt-creating capital inflows a sustainable strategy for currency stabilisation?

Foreign Currency Non-Resident (Bank) deposits are foreign-currency term deposits of NRIs with Indian banks. The RBI's special USD-INR swap facility of June 8, 2026 revived them as a currency-defence tool [1], confirming their value as a short-term shock absorber — but not as a durable substitute for structural external strength.

Role in managing exchange rate volatility

• Non-market dollar supply: the swap lets banks exchange FCNR(B) dollars with the RBI at the FBIL reference rate with a pre-fixed reverse leg, removing hedging cost and de-risking mobilisation [1].
• Scale and speed: about $73 billion flowed in within eleven weeks of launch, letting the RBI advance the FCNR(B) window's closure to August 31, 2026 [3]; the rupee firmed to a two-month high in early September 2026.
• Reserve accretion without spot intervention, conserving the RBI's ammunition for genuine disorderly movements.
• Stable maturity profile: eligibility is restricted to a minimum three-year and maximum five-year tenor [2], making these inflows far less flighty than portfolio debt.
• Signalling effect: visible policy capacity deters speculative positioning against the rupee, echoing the 2013 taper-tantrum swap window.

Limits to sustainability

• These are debt-creating flows — NRI deposits are among the largest components of India's external debt after commercial borrowings [4]; today's inflow is a contractual repayment tomorrow.
• Bunched redemption risk at the three-to-five-year mark can itself trigger the volatility it sought to cure.
• Quasi-fiscal cost: the RBI absorbs the hedging cost, creating a contingent forex liability on its balance sheet [2].
• Symptomatic, not curative: it does nothing for the current account drivers — crude import dependence and weak export competitiveness. The rupee still faced intraday pressure despite the mop-up.
• Inflows are interest-sensitive and episodic, unlike durable FDI.

FCNR(B) swaps are therefore best read as a credible bridge, not a strategy. India should use the breathing space they buy to widen non-debt flows through FDI facilitation, export diversification and rupee internationalisation, so that stability rests on earnings rather than borrowings.