RBI’s $65 Billion Dollar Scheme Worked — Now the Liquidity Is Becoming the Problem

The Reserve Bank of India designed its special foreign-currency deposit programme to pull dollars into the banking system and strengthen confidence in the rupee. It succeeded so well that the next policy problem is the rupee liquidity created by that success.

Banks have raised more than $65 billion under the FCNR(B)-linked scheme ahead of its August 31 deadline. On Thursday, the RBI gave banks more flexibility to swap large dollar inflows with the central bank after the one-day dollar/rupee swap market became unusually expensive.

The trigger

Banks are normally assigned one day a week to use the RBI’s subsidised dollar-rupee swap window. Reuters reported that the RBI told banks they could access the facility outside that weekly window for FCNR(B) transactions above $100 million. Smaller transactions remain tied to the assigned day.

That technical change sounds minor. The market reaction shows why it was needed. The one-day swap cost briefly jumped to 2.5 paise from roughly 0.40–0.50 paise in recent sessions, while one-month implied hedging costs rose sharply before easing.

What everyone sees

The $65 billion headline looks like a straightforward positive. More foreign-currency deposits increase the central bank’s buffer and can reduce panic around the rupee during external shocks.

The overlooked part is what happens when those dollars are swapped into rupees.

The second-order effect

The RBI’s swap facility injects rupee liquidity into the banking system. Reuters reported average surplus liquidity above ₹3.4 trillion in August, with traders expecting it could exceed ₹5 trillion in September as FCNR inflows and bond redemptions combine.

That creates a contradiction. The RBI wants a stronger foreign-exchange buffer, but it is also dealing with inflation risks that argue against leaving an enormous amount of cheap rupee liquidity in the system.

Bond traders are therefore watching for longer-duration variable-rate reverse repo operations, FX sell/buy swaps or other tools that drain liquidity for more than a few days.

The numbers

- FCNR(B)-related inflows: more than $65 billion - Scheme deadline: August 31 - Flexible out-of-window swap threshold: above $100 million - One-day swap cost spike: 2.5 paise - August average surplus liquidity: above ₹3.4 trillion

Positive case

The RBI absorbs the dollar inflows smoothly, keeps the rupee market orderly and drains excess domestic liquidity without pushing money-market rates into disorder. India gets a larger FX cushion without creating an inflationary liquidity problem.

Risk case

Liquidity continues to rise faster than the RBI can sterilise it. Short-term market rates stay too soft relative to the policy stance, forcing larger or longer withdrawals. That can add volatility to government bonds and complicate expectations for the next MPC move.

What would change the story

The most important data are the final amount raised by August 31, the post-deadline surplus-liquidity level, the duration and size of RBI liquidity-absorption operations, and any signal that the central bank is preparing the system for a rate increase.

Related themes

RBI, rupee, FCNR(B), bank liquidity, government bonds, FX swaps, hedging costs and monetary policy.

PriceVia view

The real signal is not that the scheme attracted dollars. It is that the scheme attracted enough dollars to change money-market plumbing. A policy tool designed to reduce one risk is now forcing the RBI to manage another.

Sources & timestamp

Reuters reports dated August 27, 2026; RBI FCNR(B) swap-facility FAQs and reporting instructions; verified August 28 at approximately 06:15 IST.

Market-risk disclaimer

For informational purposes only; not investment advice. Money-market conditions can change rapidly around central-bank operations.