Examine how special forex swap schemes such as the FCNR(B) facility help stabilise the rupee, and analyse their side-effects on domestic banking liquidity.

Facing rupee depreciation pressure, the RBI introduced a special USD-INR swap facility on 8 June 2026 covering FCNR(B) deposits, ECBs and OFCBs [1]. Such schemes stabilise the currency effectively, but the rupee they release into the banking system becomes a fresh liquidity-management burden.

How the swap facility stabilises the rupee

• Direct dollar supply: banks raise foreign currency abroad and swap it with the RBI, adding to supply in the forex market and blunting depreciation pressure.
• Cost absorption: the RBI takes on the hedging/currency risk, making overseas fundraising cheaper for banks and PSU borrowers than open-market borrowing.
• Scale achieved: inflows reached $136.38 billion by 31 August 2026 — $127.23 billion via FCNR(B) deposits, $5.26 billion via OFCBs and $3.89 billion via ECBs [1].
• Reserve build-up: the inflows shore up forex reserves, strengthening the buffer against future capital-flow volatility.
• Signalling: strong NRI and corporate response demonstrates confidence, deterring speculative positions against the rupee.

Side-effects on domestic banking liquidity

• Rupee injection: every dollar swapped releases equivalent rupees, pushing system surplus liquidity to a record ~₹10.32 lakh crore in early September 2026.
• Weakened transmission: unabsorbed durable surplus drags overnight rates below the repo rate, distorting the LAF corridor the RBI seeks to protect [2].
• Sterilisation cost: the RBI absorbed over ₹6.02 lakh crore through two 3-day VRRR auctions on 4 September 2026 — a large but only partial mop-up [3].
• Short-tenor mismatch: VRRR is a frictional tool; durable inflows may eventually need OMO sales or CRR action [2].
• Deferred obligation: swaps must be unwound at maturity, creating future dollar outflow and liquidity-tightening risk.

Such facilities are therefore a sound external-sector stabiliser whose success creates a domestic monetary challenge. Sequencing the swap window with calibrated, longer-tenor absorption — and staggering maturities to avoid a bunched reversal — would let the RBI retain exchange-rate stability without sacrificing monetary transmission.