Strong FCNR Inflows Lift India’s BoP Outlook, Create Liquidity Management Challenges

FCNR(B) inflows reach USD 127.2 billion as CareEdge raises FY27 capital account surplus and net FDI forecasts

The concessional swap window for FCNR(B) deposits closed on August 31, 2026, one month earlier than initially envisaged, with inflows reaching USD 127.2 billion. Combined with USD 9.2 billion mobilised through ECBs and OFCBs, total inflows reported by banks stood at USD 136.4 billion as of August 31, 2026, significantly above market expectations.

CareEdge expects the stronger capital inflows, along with resilient foreign direct investment (FDI), to result in a USD 106 billion balance of payments surplus in FY27, compared with a USD 23 billion deficit in FY26. However, the resulting increase in banking-system liquidity is expected to require greater liquidity management by the Reserve Bank of India (RBI).

FCNR(B) Inflows Exceed Expectations

The concessional swap window for FCNR(B) deposits closed on August 31, 2026, ahead of the initially envisaged September timeline. Inflows under the scheme reached USD 127.2 billion, substantially exceeding expectations, including CareEdge’s earlier projection of USD 70 billion.

An additional USD 9.2 billion was mobilised through External Commercial Borrowings (ECBs) and Overseas Foreign Currency Bonds (OFCBs), for which the concessional swap window remains open until December 31, 2026.

Together, banks reported total inflows of USD 136.4 billion as of August 31, 2026. Nearly half of the FCNR(B) inflows were mobilised during the final ten days of the scheme, indicating a sharp increase in participation towards its closure.

FDI Inflows Remain Resilient

Foreign direct investment has also remained supportive. Net FDI, calculated after accounting for repatriation and FDI abroad, increased 15.9% YoY to USD 6.1 billion in Q1 FY27. Gross FDI inflows rose 7.6% YoY during the period.

Policy changes are expected to provide further support to FDI. In March 2026, the Department for Promotion of Industry and Internal Trade (DPIIT) eased investment norms for countries sharing a land border with India.

Later, through Press Note 3 released in July 2026, the government permitted FDI in inventory-based e-commerce for the exclusive export of goods manufactured in India.

Although FDI inflows can remain uneven, CareEdge expects the broader upward trend to continue. It has therefore revised its FY27 net FDI forecast to USD 20 billion from USD 15 billion earlier.

FY27 Balance of Payments Outlook Strengthens

The stronger-than-expected banking-sector and investment inflows have prompted CareEdge to revise its external-sector projections for FY27.

The capital account surplus is now projected at USD 150 billion. With the current account deficit estimated at USD 44 billion, or around 1% of GDP, the overall balance of payments is expected to record a surplus of USD 106 billion in FY27.

This compares with a balance of payments deficit of USD 23 billion in FY26.

Balance of Payments Position

FY27 figures are CareEdge projections. FCNR Deposits, ECBs and OFCBs are included in the “Loans, Banking Capital & Other Capital” category of the Capital Account. The figure for FY27 is after adjusting for netting and outflows under Other Capital.

Rupee Appreciation Expected to Remain Limited

The inflows generated through the concessional swap window have strengthened the RBI’s ability to support the rupee amid external volatility.

The RBI has intervened in both spot and forward markets, with its forward book reaching a record net short position of USD 136.7 billion in July 2026, compared with USD 103.3 billion in June 2026.

The rupee has appreciated marginally over the last couple of weeks, partly reflecting changing expectations around a persistently weaker rupee. However, the scope for significant appreciation remains limited.

The RBI is expected to use part of the incoming funds to unwind its forward short position. At the same time, higher domestic inflation during the year is expected to reduce the extent of the rupee’s Real Effective Exchange Rate (REER)-implied undervaluation.

The currency could also face pressure from higher oil prices linked to the volatile geopolitical environment, volatile FPI flows and rising global G-sec yields.

CareEdge expects the USD/INR to remain in the range of 93–94 by end-FY27.

FCNR Inflows Expected to Increase Liquidity Surplus

The sizeable inflows are expected to strengthen both the capital account and overall balance of payments while also contributing to higher liquidity in the banking system.

However, the increase could be partly offset by seasonal currency demand and the maturity of the RBI’s forward book.

Currency in circulation (CiC) is estimated to increase by around Rs 1.1 trillion from June levels by December, reflecting the seasonal increase associated with the festive period.

The maturity of the RBI’s short positions in the forwards market could create an additional drag of around Rs 3 trillion, with the RBI’s short-forward book maturing standing at USD 22 billion in three months.

Meanwhile, CRR accretion resulting from deposit growth is expected to reduce core liquidity by Rs 0.7 trillion.

After accounting for the expected increase in currency in circulation during the festive season and the maturity of the RBI’s short dollar positions in the forward market, CareEdge expects core liquidity to rise from Rs 8.1 trillion in mid-August to potentially around Rs 13–14 trillion by December-end.

This would represent around 4.5–5% of Net Demand and Time Liabilities (NDTL), assuming the RBI does not undertake liquidity management operations.

Higher core liquidity would translate into higher banking-system liquidity after accounting for changes in the government cash balance.

RBI Likely to Focus on Liquidity Absorption

The RBI has previously used several instruments to absorb excess liquidity, depending on prevailing conditions, with differing effects on bond and foreign exchange markets.

In the current environment, the central bank could initially use a combination of liquidity management measures, including longer-tenor Variable Rate Reverse Repo (VRRR) operations and Open Market Operation (OMO) sales, to absorb surplus liquidity.

If the surplus remains persistent, additional measures such as the Incremental Cash Reserve Ratio (I-CRR) could follow.

However, such a move could partly offset the benefit of the exemption from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) provided to banks for raising FCNR deposits from overseas.

If excess liquidity continues for an extended period, a hike in I-CRR could nevertheless be considered.

The RBI’s short forward book could be allowed to mature at its own pace rather than being actively reduced, in order to avoid additional weakening pressure on the currency.

Forex swaps appear less likely as a liquidity-management option, as the RBI is expected to prioritise maintaining comfortable reserve levels amid the volatile external environment.

The Market Stabilisation Scheme (MSS) is also unlikely to be used as a liquidity management tool.