Mumbai: India is bringing the curtains down on its biggest effort in 13 years to raise dollars from overseas Indians, after a special scheme to encourage local deposits scooped up more than $52 billion in just over two months. The scheme will now run until the end of August, the Reserve Bank of India (RBI) said, cutting short earlier plans to keep it open until the end of next month.
The scheme, conceived at a time the Indian rupee was sliding towards 96 a dollar, managed to stabilize the local currency, reflecting the success of a similar scheme rolled out in 2013. On Friday, the rupee closed at 95.44 to a dollar.
The pace of capital inflows under foreign currency non-resident (B) or FCNR(B), external commercial borrowings (ECB) and overseas foreign-currency borrowings has been much heavier than expected. In just 67 days, banks in India mobilized a total of $56.85 billion in foreign-currency inflows through the RBI’s special window, official data showed. FCNR(B) deposits accounted for $52.3 billion or 92% of the total, while overseas foreign currency borrowings (OFCBs) contributed $2.81 billion and external commercial borrowings (ECBs) $1.74 billion.
In a press statement, the RBI said it had decided to make the facility available for FCNR(B) deposits only for deposits mobilized until 31 August, “based on the encouraging response to the Swap Facility for FCNR(B) deposits and the resultant forex inflows.” However, banks can avail of the corresponding swaps with the RBI until 11 September.
However, the central bank retained the original timeline for the other two channels. The scheme for ECBs and OFCBs will continue to remain open until 31 December, 2026, as outlined earlier.
In its June monetary policy, RBI had allowed banks to raise fresh and renewed FCNR(B) deposits with maturities of three to five years and swap those dollars with the central bank at a concessional rate. The FCNR scheme allows non-resident Indians (NRIs) to make leveraged and unlevered deposits at Indian banks.
“There has been a discussion and public rhetoric around the cost of this programme. I’m not saying that is why they will shut the programme. It is just that if $15 billion comes in, the math is different, and if $100 billion comes in, the math is very different,” said Ajay Marwaha, president and head of fixed income at Nuvama Group. He said the RBI is now looking at the material impact of the programme’s cost. “It is not a free lunch.”
Marwaha also said the money has not been deployed entirely the way initially expected, with tax-related issues limiting the use of some overseas conduits and resulting in more funds being on-lent domestically. He said it could create excess rupee liquidity. “We needed it to stabilize FX, but while stabilizing FX, if excess INR liquidity is created here, it will stoke inflation.”
The decision to end the scheme early comes a just week after RBI governor Sanjay Malhotra said that despite strong inflows witnessed in its FCNR(B) deposit window, the central bank has no immediate plans to pre-close or postpone the scheme.
“The early closure of the FCNR (B) window indicates that the response to the scheme has exceeded RBI estimate,” Gaura Sengupta, chief economist at IDFC First Bank said. She also said that total inflows under FCNR(B) are still expected to be robust at $70 billion against the earlier expectation of $80-90 billion. “Banks are likely to push for FCNR(B) deposits in the last two weeks of the scheme,” Sengupta said.
FCNR(B) deposits allow non-resident Indians to hold foreign-currency deposits with Indian banks, insulating the depositor from exchange-rate fluctuations. Under the special swap arrangement, banks could access dollar liquidity from the RBI against the foreign-currency inflows mobilised through the facility.
