RBI's Rupee Fix: FCNR(B) Swaps, FERR and Hedging Costs

The Lift Line

“In other words, rather than restoring confidence, the RBI’s new measures risk reinforcing the very pessimism they are meant to address.” (Rajeswari Sengupta, Business Standard)

Why This Editorial Matters for Your Exam

In the news: In a column in Business Standard of 20 October 2026, “RBI’s rupee fix: What is it solving?”, Rajeswari Sengupta, associate professor of economics at the Indira Gandhi Institute of Development Research, Mumbai, asks why the Reserve Bank of India (RBI) has tightened its foreign exchange rules when its June swap windows had drawn about $133 billion of FCNR(B) deposits. Her answer: if the rupee’s fall is structural, regulatory curbs will at best buy time, and they carry costs of their own.

Read it with our explainer on the RBI’s 10 October measures and the Foreign Exchange Risk Reserve, our notes on the early closure of the FCNR(B) swap window and the $73 billion interim count, the MPC’s rate hike of 7 October and India’s balance of payments for April-June 2026. Earlier rupee steps are in our note on the April ban on rupee NDD contracts. Three more columns of the day take up the same theme: Ananth Narayan on confronting economic trade-offs, C. Rangarajan and N.R. Bhanumurthy on inflation and the supply of money, and Ajit Ranade on how India’s high interest burden muddles the RBI’s task.

GS Paper 3: Indian economy and issues relating to mobilisation of resources and growth; the external sector (balance of payments, exchange rate, capital flows); the RBI’s monetary and foreign exchange management. Interview: the trade-off between defending a currency and letting it adjust.

UPSC Relevance. Prelims: FCNR(B) deposits, ECBs and OFCBs; how a currency swap with the central bank works; the Foreign Exchange Risk Reserve; the RBI’s powers under FEMA, 1999 and Section 45W of the RBI Act, 1934; what a forward premium measures. Mains: managing a falling currency, sentiment versus structural causes of depreciation, the costs of curbs on hedging, and central bank communication.

Background and Context

The June 2026 swap windows

The RBI announced the facility in the Governor’s Statement of 5 June 2026 and issued two circulars on 8 June 2026. FCNR(B) deposits themselves were not new: banks could keep offering regular FCNR(B) deposits without the swap. What was new was a window to swap the dollars with the RBI on concessional terms.

How the FCNR(B) swap worked. In the first leg the bank sold US dollars to the RBI at the FBIL Reference Rate; the second leg took place at the same rate: “The swap will be undertaken at par.” The swap covered “only the principal amount of the deposits and not the interest component”, and the deposits carried a one-year lock-in. Because both legs used the same rate, the bank paid no forward premium on the principal. The ECB and OFCB swap was priced differently, at “a fixed rate of 1.5 per cent per annum compounded semi-annually”.

The 10 October 2026 measures

The full explainer is in our 10 October note. In brief:

• Foreign Exchange Risk Reserve (FERR) (A.P. (DIR Series) Circular No. 26): for foreign exchange derivative contracts involving the rupee, undertaken to hedge current account exposures, in which the user buys foreign currency against the rupee and the notional value exceeds USD 2 million, the Authorised Dealer keeps with the RBI an FERR in cash equal to 20 per cent of the rupee equivalent of the notional amount, until the contract ends. It applies to contracts undertaken after the Directions were issued.
• Derivative rules (Circular No. 25): rebooking of cancelled contracts is barred; the limit for hedging without showing an underlying exposure falls from USD 100 million to USD 5 million; users must undertake that the exposure is not hedged elsewhere.
• Oil companies: a direct dollar window for three oil marketing PSUs, effective 12 October 2026.
• Legal basis: Sections 10(4) and 11(1) of FEMA, 1999 and Section 45W of the RBI Act, 1934.
• Stated reason: “to ensure orderly functioning of the foreign exchange market” and “evolving market conditions”.

Sengupta describes the FERR as “a hefty tax on forward purchases of dollars”. In the circular it is a cash reserve that the bank keeps with the RBI until the contract ends; the circular places the reserve on Authorised Dealers and does not say how its cost reaches customers. A press report put the rupee at 95.15 to the dollar at the close on 14 October and said it “has fallen by 7 per cent in 2026”.

The Issue, Decoded

The Analysis

1. The puzzle. The RBI cut the FCNR(B) deposit window short, a month before its planned date, which suggested that the dollars raised were more than enough. Yet on 10 October it tightened the foreign exchange rules “significantly”. Sengupta’s question is simple: if the June scheme succeeded, why were these measures needed?

2. Two possible causes. She offers two explanations for a long depreciation: sentiment towards the Indian economy has soured, or India’s balance of payments is suffering structural shocks. The diagnosis decides the remedy.

3. The sentiment fix has been tried. If the problem were only sentiment, strong measures might “jolt the market back to its senses”. Her verdict: “Reasonable, but wrong.” Despite the large FCNR(B) inflows the RBI kept intervening in the market and, citing unnamed estimates, she says it has already used up “nearly half” of the dollars mobilised through the swap schemes. The rupee still fell, and the RBI moved from inflows to regulation.

4. The structural story. She lists the shocks of the last couple of years: India falling behind in frontier AI models, the West Asia war and the “huge energy bill” it imposed, and, most disappointing to her, the finding that “China+1” did not shift global manufacturing to India, as the low levels of foreign direct investment show. If these are the causes, another round of palliatives “will, at best, provide short-term relief”.

5. Costs that exceed the benefits. Palliatives can buy time, she grants, but here she sees two costs:

• The signal. Stringent curbs so soon after the “successful” June schemes tell the market that the RBI is deeply worried about the balance of payments and that spot and forward intervention is no longer enough. Foreign investors may then worry too.
• Hedging costs. Citing reports, she says the one-year forward premium has risen above 4.5 per cent, the highest since January 2022. Manufacturers who depend on imported inputs must then bear more currency risk themselves, which can discourage investment, “the exact opposite of what the economy needs”.

6. The ask. The RBI should explain what prompted the steps and how it expects the benefits to outweigh the costs. Sengupta reads the RBI as citing the need to preserve financial stability; its own documents of 10 October give the reason as the “orderly functioning of the foreign exchange market” and “evolving market conditions”, which is part of why she finds the purpose unclear.

7. Two numbers to read precisely. The $133 billion is the FCNR(B) line alone; with OFCBs and ECBs the swap facility drew USD 1,43,596 million. And, for context, what closed on 31 August was the window for mobilising FCNR(B) deposits: swaps could still be drawn till 11 September, and the ECB and OFCB window runs to 31 December 2026.

Data and Institutions Vault

Prelims-grade facts:

The June 2026 swap windows:

• Announced in the Governor’s Statement of 5 June 2026; RBI circulars of 8 June 2026.
• FCNR(B) swap: fresh deposits of 3 to 5 years, one-year lock-in, principal only, at par at the FBIL Reference Rate.
• FCNR(B) window: deposits mobilised till 31 August 2026 (planned: 30 September); swaps till 11 September.
• ECB and OFCB swap window open till 31 December 2026.
• FCNR(B) mobilised: USD 1,32,980 million (about $133 billion); all three lines: USD 1,43,596 million.

The 10 October 2026 measures:

• FERR: 20% of the notional, in cash with the RBI till the contract ends; contracts above USD 2 million (Circular No. 26).
• Hedging without proof of exposure: USD 100 million to USD 5 million; no rebooking of cancelled contracts (Circular No. 25).
• Direct dollar window for three oil marketing PSUs from 12 October 2026.
• Legal basis: FEMA, 1999, Sections 10(4) and 11(1); RBI Act, 1934, Section 45W.

Watch the trap: the FERR is a cash reserve, not a tax; and $133 billion is FCNR(B) alone, not the whole swap facility.

The Debate

The author’s case. The swap inflows did not stop the rupee’s fall, so the problem is probably structural. Curbs on hedging will not fix the balance of payments; they raise costs for manufacturers and signal alarm to foreign investors. The RBI owes the public an explanation.

The other side.

• Speculation, not the level. The RBI Governor said in an interview reported on 14 October: “The high proportion of same-day cancellations and rebooking indicated a significant speculative element in the forex derivatives market. We have, therefore, taken these measures to curb such excessive speculation.” On this reading the bar on rebooking and the lower no-exposure limit target speculative bets, not genuine hedgers.
• Not capital controls. The Governor also said, as reported, that the measures should not be seen as capital control measures, and the press release describes them as meant to “strengthen market discipline” while keeping “an orderly and transparent market environment”.
• The swap did its job. The RBI cut the deposit window short because of the “encouraging response”. Inflows can calm a market for a time without settling its direction, which is the most a swap window can do.
• Where the critique bites. The FERR applies to contracts that hedge current account exposures, and Sengupta’s concern is that its cost reaches importers who buy dollars forward; the circular does not say how banks pass the cost on.

The balanced verdict. Both diagnoses can be partly true. Curbing same-day cancel-and-rebook trades can reduce speculative pressure, but no derivative rule changes the energy import bill or the flow of foreign direct investment. The test of the 10 October package is whether it calms volatility without making hedging so costly that firms carry open currency risk, and the RBI’s case is stronger if it explains that trade-off in public.

How to Think About This

Separate the symptom from the cause, and match each tool to what it can reach. A falling rupee is a symptom; the balance of payments is where the cause sits. Swaps and reserves buy time, rules on derivatives can curb speculation, and only trade, energy and investment policy change the structure. Then read the instrument in its own words: an opinion writer may call the FERR a tax, while the circular calls it a reserve, and an exam statement will test the circular’s version. Finally, ask what a policy signals: a sudden tightening says something about the authority’s own view of the risk, and markets read that as closely as the rule itself.

Diagram-in-Words

Takeaway Box

• Core idea: if the rupee’s fall is structural, curbs on derivative contracts buy time at best; the RBI should explain the problem it is solving and the costs it accepts.
• Key fact: FCNR(B) swap inflows of USD 1,32,980 million (to 31 August 2026); FERR of 20% in cash with the RBI on dollar-buying hedges above USD 2 million.
• Counterpoint: the RBI targets speculation, citing a high share of same-day cancellations and rebooking, and the Governor says the steps are not capital controls.
• Mains use: exchange rate management, the trade-offs a central bank faces under volatile capital flows, the cost of hedging for manufacturers, and central bank communication.

Revision Flowchart

Sources:

• Rajeswari Sengupta, “RBI’s rupee fix: What is it solving?”, Business Standard, 20 October 2026 (online 19 October)
• RBI circulars RBI/2026-27/99 and RBI/2026-27/100 (8 June 2026) on the swap facilities; RBI FAQs on the swap facility
• RBI press releases 2026-2027/900 (14 August 2026) and 2026-2027/1160 (21 September 2026)
• RBI A.P. (DIR Series) Circulars No. 25 and 26 and press releases 2026-2027/1305 and 1306 (10 October 2026)
• Deccan Chronicle, report on the RBI Governor’s interview (14 October 2026)

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