The Reserve Bank of India (RBI) has initiated a dialogue with commercial banks to ascertain the underlying reasons for the unexpectedly subdued response to its latest foreign-currency deposit scheme, an initiative designed to bolster India’s external sector stability. Launched in June with ambitious targets of attracting $30-40 billion, the programme has, in its initial months, secured approximately $7 billion in inflows, significantly trailing the pace and magnitude of a similar effort undertaken in 2013 that ultimately mobilised $26 billion. This slower-than-anticipated accretion has prompted the central bank to scrutinise the effectiveness of its measures, particularly given the prevailing global economic uncertainties and domestic currency pressures.
The current scheme for Foreign Currency Non-Resident (Bank) or FCNR(B) deposits was conceived as a strategic intervention following a period of intense pressure on the Indian rupee. Factors such as surging global crude oil prices, persistent outflows by foreign portfolio investors (FPIs) from Indian equity and debt markets, and a widening trade deficit had collectively exerted considerable depreciation pressure on the national currency. To mitigate these impacts and augment India’s foreign exchange reserves, the RBI introduced a critical concession: it would absorb the currency hedging costs for banks on fresh FCNR(B) deposits with maturities ranging from three to five years. This mechanism was intended to empower commercial lenders to offer non-resident Indians (NRIs) more attractive dollar-denominated interest rates, thereby making Indian FCNR(B) deposits competitive against international alternatives without exposing banks to significant exchange rate risks.
During recent consultations with senior bank executives, held ahead of the bi-monthly monetary policy review, RBI officials explicitly questioned the sluggish mobilisation of FCNR(B) inflows. The discussions focused on understanding the impediments banks faced in attracting these deposits and assessing the realistic potential for future accretion. While the central bank’s intent was clear – to infuse liquidity and stability into the forex market – the initial outcomes have necessitated a deeper dive into market dynamics and investor sentiment.
Bankers, in their interactions with the RBI, offered a multi-faceted explanation for the measured pace. A recurring theme was the assertion that such deposit schemes typically require time to gain momentum. They highlighted that the operational intricacies involved in setting up the product, establishing adequate leverage arrangements, and effectively communicating the offerings to the vast NRI diaspora globally take time. Comparisons were drawn to the 2013 FCNR(B) programme, which also experienced a gradual build-up in its initial phase before accelerating significantly. This perspective suggests that the current inflows, while modest, are not entirely unprecedented for the early stages of such an initiative.
However, beyond the operational ramp-up, more profound macroeconomic factors are at play. A significant challenge cited by banks is the global environment of rising dollar interest rates. Aggressive monetary tightening by the US Federal Reserve and other major central banks to combat multi-decade high inflation has led to a substantial increase in yields on dollar-denominated assets globally. For instance, while Indian banks might offer an NRI 6.5% on a dollar deposit, compared to perhaps 5% on a similar deposit in a developed market like the UK or the US, the perceived risk-adjusted return might still deter some investors. The overall rising cost of overseas funding for banks, even with the RBI’s hedging cost absorption, makes it more challenging to offer rates that are compelling enough to overcome inherent inertia or perceived risks associated with parking funds in an emerging market economy amidst global volatility.
NRI sentiment also plays a crucial role in the scheme’s uptake. Many non-resident Indians remain cautious and undecided, influenced by the persistent selling by foreign portfolio investors in the Indian markets and the subsequent depreciation of the Indian rupee. This macroeconomic uncertainty, coupled with global geopolitical tensions and inflationary pressures, contributes to a risk-averse stance among potential depositors. Locking up funds for three to five years in an evolving global landscape, even with attractive rates, requires a degree of confidence in the long-term stability and growth prospects that might be tempered by current headlines. The concept of "leveraged FCNR deposits," though not explicitly part of the current scheme’s direct offerings, has also historically introduced an element of complexity and risk perception among NRIs, further influencing their decision-making.
The broader context of India’s external sector underscores the urgency behind the RBI’s efforts. India’s reliance on crude oil imports, for instance, means that elevated global energy prices translate directly into a larger import bill, putting pressure on the current account deficit. FPI outflows, which saw billions of dollars exit Indian markets in recent quarters, further exacerbate this pressure, straining the country’s foreign exchange reserves. As of the latest available data, India’s forex reserves have seen fluctuations, highlighting the need for stable, non-debt creating inflows. While FCNR(B) deposits constitute only a segment of overall NRI deposits – latest available data from April indicates outstanding FCNR(B) deposits at around $33.92 billion, roughly one-fifth of the total NRI deposit base of $165.59 billion across FCNR(B), NRE, and NRO accounts – their strategic importance for currency stability cannot be overstated.
Comparing the current scenario to the 2013 "Taper Tantrum" episode offers valuable insights. In 2013, when the US Federal Reserve signalled a tapering of its quantitative easing program, emerging markets, including India, faced a sudden and sharp reversal of capital flows. The RBI’s FCNR(B) scheme then, which also involved absorbing hedging costs, proved highly effective, attracting $26 billion and playing a critical role in stabilising the rupee and replenishing reserves. However, the global economic backdrop is distinct today. In 2013, global interest rates were exceptionally low, making India’s relatively higher rates even more appealing. Today, major central banks are aggressively raising rates, creating a more competitive landscape for dollar-denominated funds. This difference in global monetary policy cycles presents a more formidable challenge for attracting significant inflows.
Recognising the multi-faceted nature of the challenge, the RBI has adopted a proactive approach. It has requested banks to provide daily data on FCNR(B) deposits to closely monitor the inflows. Furthermore, senior officials from both the government and the central bank have held separate meetings with bank chiefs, explicitly urging them to intensify their outreach programmes to the NRI community. These discussions are part of a broader strategy to ensure adequate credit flow to productive sectors of the economy and effective transmission of monetary policy rates, but foreign currency mobilisation remains a central point of focus.
The success of this FCNR(B) scheme is not just about shoring up reserves; it is also about signalling stability and confidence to international investors and the diaspora. Stable inflows can reduce the need for more drastic domestic monetary tightening measures, provide a buffer against external shocks, and contribute to a more predictable exchange rate trajectory. As global economic conditions continue to evolve, marked by persistent inflation, supply chain disruptions, and geopolitical uncertainties, the competition for global capital remains intense. India’s ability to effectively tap into the significant financial resources of its diaspora will be a key determinant of its resilience in navigating these complex global headwinds. The coming months will reveal whether the initial inertia can be overcome, and if the strategic intent of the RBI’s intervention will translate into the desired scale of foreign currency inflows, ultimately reinforcing India’s economic stability.
