Forty-five days into a critical initiative by India’s central bank to shore up its foreign exchange reserves and bolster the rupee, a stark divergence has emerged in the transparency of data reporting among the nation’s lenders. While public sector banks have openly communicated their progress and targets under the Foreign Currency Non-Resident (Bank) or FCNR(B) deposit scheme, their private sector counterparts, including the largest players, have largely maintained a discreet silence regarding their actual inflows. This reticence comes amidst an urgent push by the Reserve Bank of India (RBI) and the government to attract overseas capital, with initial market estimates suggesting a cumulative inflow of $12-15 billion to date, far below earlier lofty projections of up to $40 billion, or even $70 billion by some optimistic analysts.
The FCNR(B) deposit scheme, reactivated on June 5 and set to conclude on September 30, is a strategic response to prevailing macroeconomic pressures. India’s foreign exchange reserves have been under considerable strain, depleting from a peak of over $640 billion in October 2021 to around $570 billion by mid-2022, primarily due to the RBI’s interventions to defend the depreciating rupee and capital outflows triggered by global monetary tightening. The current account deficit (CAD) has also widened, necessitating robust foreign capital inflows. The scheme allows banks to raise FCNR(B) deposits with maturities ranging from three to five years, offering a concessional swap rate with the RBI for converting these dollar inflows into rupees. This mechanism aims to insulate banks from exchange rate risks and enable them to offer attractive interest rates to Non-Resident Indians (NRIs), making these deposits highly competitive in the global financial landscape.
For NRIs, the FCNR(B) deposits present a compelling proposition. With interest rates exceeding 6% in some cases, these deposits offer significantly higher yields compared to typical offerings in developed markets, which have only recently begun to see rate hikes. Moreover, the tax-exempt status of these deposits in India further enhances their appeal. A key attraction is the provision for leverage, allowing NRIs to deposit a smaller amount of their own capital and borrow the rest from banks, often through their international branches or partner institutions. This magnifies the potential returns for investors, turning a seemingly conservative deposit scheme into a high-yield opportunity. HDFC Bank, for instance, has been mobilizing FCNR deposits through direct inflows, self-provided leverage, and leverage arranged via overseas partner banks, acknowledging the strong interest even from small-ticket NRI customers.
Despite the clear benefits, India’s leading private sector banks—HDFC Bank, ICICI Bank, and Axis Bank—have remained tight-lipped on their specific FCNR(B) collection figures during recent earnings calls. While acknowledging strong NRI interest and the significant opportunity presented by the scheme, executives like HDFC Bank’s MD & CEO Sashidhar Jagdishan have stated that precise numbers would be disclosed only closer to the scheme’s closure. This approach is likely driven by competitive considerations, a desire to manage market expectations, and the proprietary nature of such client-specific data. Discretion is often a hallmark of private banking, especially when dealing with high-net-worth individuals and their complex financial arrangements. Kotak Mahindra Bank’s CEO, Ashok Vaswani, similarly noted strong demand but refrained from sharing internal targets, emphasizing the bank’s focus on supply-side execution. Among private lenders, only RBL Bank has publicly stated mobilizing $150 million in FCNR deposits so far, without detailing its overall targets. Mid-sized private banks like Federal Bank and Yes Bank have confirmed receiving both leveraged and unleveraged inflows, with Federal Bank offering 8-12 times leverage and Yes Bank capping it at nine times.
In stark contrast, public sector banks have adopted a more transparent stance. Union Bank of India aims to garner $1.5-2 billion by September, having already secured $106 million. Punjab National Bank has reported $419 million in inflows and targets $2.5 billion from the scheme, supplemented by a planned $500 million overseas bond issue. Indian Bank has collected around $150 million and anticipates reaching $1.5-2 billion, while Central Bank of India targets $400 million after an initial $8.4 million. Bank of Maharashtra has even raised its five-year FCNR deposit rate to 6.60% to attract more inflows, expecting a pick-up in August and September. These disclosures reflect the public sector’s different reporting mandates and perhaps a greater emphasis on contributing to national economic objectives, even if it means sacrificing some competitive secrecy. State Bank of India, the nation’s largest lender, is estimated to have mobilized approximately $2 billion alone.
The attractiveness of the scheme is amplified by the leverage mechanism, which allows NRIs to multiply their potential returns. Foreign lenders, particularly through financial hubs like GIFT City, have been pivotal in facilitating these leveraged transactions. HSBC, for instance, was reported to be offering NRIs leverage of up to 19 times their own capital through its GIFT City branch, enabling a small equity contribution to generate substantial deposit volumes. While offering significant upside, such high leverage also introduces inherent risks for both the investors and the facilitating banks, requiring robust risk management frameworks. The precise quantum of leveraged versus unleveraged inflows will be crucial in assessing the true underlying NRI capital commitment.
However, the FCNR(B) drive has faced a slower-than-expected start, encountering several headwinds. Initial operational uncertainties and delays in the issuance of clear FAQs (Frequently Asked Questions) by the central bank hampered early mobilization efforts. Bankers also grappled with complex tax implications for NRIs, particularly those residing in jurisdictions like the US and UK, where reporting requirements such as FATCA (Foreign Account Tax Compliance Act) can deter participation in leveraged structures. This necessitated separate meetings by the RBI and the government with bank chiefs in mid-July to clarify guidelines and urge more aggressive promotion of the scheme.
A significant setback came in early July with a circular from the UAE central bank, restricting certain facilitative activities by representative offices of foreign banks, including documentation support and cross-selling. The UAE is a crucial hub for Indian diaspora and a major source of NRI deposits and remittances. This regulatory change directly impacted the ability of banks to mobilize FCNR(B) deposits from a key market, dampening expectations. Indian authorities are reportedly engaging with the UAE central bank to address these concerns, highlighting the geopolitical dimension of capital mobilization efforts.
Globally, the environment for attracting capital is intensely competitive. With major central banks like the US Federal Reserve and the European Central Bank aggressively raising interest rates to combat inflation, global liquidity is tightening, and capital is increasingly gravitating towards safer, higher-yielding assets in developed markets. This poses a challenge for emerging economies like India, which must offer even more attractive incentives to draw foreign capital. While India’s robust growth prospects remain appealing, the confluence of global monetary tightening and domestic operational hurdles has moderated the initial enthusiasm for the FCNR(B) scheme. Barclays, for instance, initially projected $25-30 billion as a reasonable base case for inflows, but later noted that reported FCNR-B inflows were around $5-6 billion by mid-July, significantly lower than the run rate expected for the loftier $40-70 billion targets. The brokerage attributed the limited inflow partly to earlier uncertainties regarding leverage and the use of GIFT City branches.
The ultimate success of the FCNR(B) scheme will have tangible implications for India’s macroeconomic stability. A substantial inflow would provide a much-needed boost to the nation’s foreign exchange reserves, offering a stronger buffer against external shocks and potentially lending stability to the rupee. It would also help bridge the current account deficit, reducing reliance on other, more volatile forms of capital. Furthermore, the increased liquidity within the banking system could translate into greater lending capacity, supporting domestic economic activity. However, the current pace suggests that the scheme might not fully meet the most ambitious expectations, underscoring the complexities of global capital flows and the importance of seamless operational execution. With only a few weeks left until the September 30 deadline, the coming days will be critical in determining the final tally and the scheme’s overall contribution to India’s financial resilience.
