Examine how capital inflows through NRI deposit schemes can create liquidity management challenges for the central bank.

Non-resident deposit schemes such as FCNR(B) are a proven tool for shoring up external buffers — the RBI's 2026 special USD-INR swap window mobilised about $136.4 billion across FCNR(B) deposits, ECBs and OFCBs by 31 August 2026 [1]. Yet every dollar absorbed releases rupees domestically, converting an external-sector success into an operational burden for the central bank.

How the inflows become a liquidity problem

• Under the swap window, banks sell mobilised dollars to the RBI and receive rupees; reserve accretion shows up in the Weekly Statistical Supplement as record forex reserves [4], while an equivalent rupee injection swells systemic surplus.
• Unlike fiscal or seasonal swings, this surplus is durable — it is created by multi-year deposits, not a one-week mismatch.

Challenges for the central bank

• Weak transmission: excess liquidity pushes the overnight Weighted Average Call Rate (WACR) below the repo rate, blunting the policy signal; the RBI's Internal Working Group reaffirmed WACR as the operating target precisely to protect this link [3].
• Inflation risk: unabsorbed liquidity fuels demand-pull pressures, complicating the 4%±2% inflation-targeting mandate.
• Sterilisation burden: overnight VRRR auctions only park money for a day — a recent auction absorbed ₹71,971 crore of ₹75,000 crore notified at a 5.24% cut-off, with 96% bid coverage [2] — so the operation must be repeated indefinitely, and under-subscription shows the RBI cannot compel participation.
• Quasi-fiscal cost and reversal risk: the RBI bears banks' hedging cost, and on maturity the flows reverse, flipping the task from absorption to injection.

Way forward

• Match durable surplus with durable tools — OMO sales, longer-tenor VRRR and FX swaps, rather than overnight operations; the Internal Group on LAF had even suggested market stabilisation instruments for enduring surpluses [5].
• Prefer non-debt-creating flows like FDI for structural financing.

Thus NRI deposits buy external resilience at the price of domestic liquidity complexity. A calibrated mix of tenor-matched absorption, advance signalling of auctions [3] and a shift toward stable, non-debt inflows would let India retain the buffer while restoring full monetary transmission.