Uday Kotak Suggests Relaunching FCNR(B) Scheme To Stabilise Rupee

The Indian rupee has depreciated more than 11% YTD, including a 5.5% drop this quarter amid rising oil prices and foreign investor outflows. RBI ordered authorised dealers to limit end-of-day onshore rupee open positions to $100 million, to be complied with by April 10, 2026. Veteran banker Uday Kotak suggested reintroducing an FCNR(B)-style swap to attract dollar NRI deposits — a tool that previously mobilised about $26 billion in 2013 — as an emergency measure to stabilise FX reserves and the currency.

Analysis

Reintroducing an FCNR(B)-style window is primarily a tactical FX-liquidity lever, not a structural cure. Mechanically, it can attract concentrated NRI USD deposits quickly, compress USD/INR spot and forward levels within days–weeks, and materially alter dealer positioning because authorised-dealer caps reduce natural two-way liquidity. However the central bank will likely sterilise much of the INR liquidity to avoid domestic overheating, which creates an asymmetric outcome: currency relief coupled with tighter short-end domestic funding.

Winners and losers will be defined by balance-sheet and distribution footprints rather than headline sectors. Banks with deep NRI acquisition channels and in-house swap capacity (large private banks) can monetize new USD liabilities and expand fee/asset spreads, while exporters and IT services face immediate FX translation headwinds and compressed INR-revenue when the rupee rallies. Sterilisation raises short-term rates, which helps floating-rate cash providers and money-market paper but pressures asset-sensitive credit and leveraged corporates who had priced funding at lower levels.

The policy is high-conviction but high-ephemerality: an announcement causes a fast technical squeeze (days–6 weeks) if terms are attractive; the net macro benefit fades when incentives are withdrawn (3–12 months). Tail risks cut both ways: a deepening geopolitical shock could swamp any deposit inflow, while a poorly sterilised programme could push term yields materially higher and tighten domestic credit spreads. Key monitoring triggers: explicit swap-window pricing, sticker rates on FCNR(B)-like instruments, RBI sterilisation operations, oil-price trajectory, and non-resident deposit flow data over the first two settlement cycles.

Key Decisions for Investors

• Event-driven FX option (3M): Buy 3-month USDINR put options (i.e., long INR) ~1% OTM if RBI signals an FCNR(B)-style window; premium ~0.3–0.7% expected, target 2–4% INR appreciation within 1 month for 3–6x payoff; downside = premium paid.
• Equity pair (3–6 months): Long KOTAKBANK.NS and HDFCBANK.NS (equal weight) vs short INFY.NS (half notional per bank leg) to express capture of NRI deposit flows and swap income vs exporter translation risk; target 15–25% relative move, max loss 10–12% on individual names—size to 1–2% portfolio risk.
• Short-duration rates / liquidity (1–4 months): Reallocate short cash into 3–6 month high-quality floating-rate paper or AAA commercial paper in India to capture a 25–75bp pickup if RBI sterilises; primary risk is opportunity cost if rates do not rise—keep duration <0.25 years.
• Asymmetric tail hedge (6–12 months): Buy 6–12 month USDINR call options 2% OTM sized to 0.5–1% of FX exposure to protect against a renewed, sustained depreciation if geopolitical shock deepens; premium is insurance cost vs open FX exposure losses.