The Reserve Bank of India’s decision to revitalize Foreign Currency Non-Resident (Bank) or FCNR-B deposits is anticipated to attract fresh long-term foreign exchange inflows, as per a report by Jefferies. This focus on FCNR-B deposits aims to gather funds from non-resident Indians for a 3–5 year period, potentially creating a stable channel for forex inflows into the country’s banking system. Drawing parallels with the RBI’s 2013 measures, the report highlighted that around $34 billion was mobilized through FCNR-B and external commercial borrowing (ECB) schemes, equivalent to about 12% of India’s foreign exchange reserves at that time and nearly 3% of total bank deposits.
The current cycle’s key aspect to monitor is the clarity on leverage available to depositors, especially with the narrower yield differential between Indian and US assets compared to 2013. The report suggested that this time, the central bank might absorb the full hedging cost and potentially exempt such deposits from statutory liquidity ratio (SLR) and cash reserve ratio (CRR) requirements. This approach would be more liberal than in 2013 when the RBI capped hedging costs for banks at 3.5%.
The report also mentioned that public sector undertakings (PSUs) have been permitted by the central bank to raise ECB funds, with potential hedging costs being borne by the RBI until September 30, 2026. The 2013 mobilization drive was deemed highly successful by the brokerage, attributing it to leverage structures that allowed investors to increase exposure through bank-issued standby letters of credit (SBLCs), resulting in larger inflows. However, subsequent regulatory changes discouraged leverage through such instruments.
India’s current foreign exchange reserves, standing at around $682 billion, are significantly higher than in 2013, potentially influencing the scale and design of the ongoing mobilization effort, according to the brokerage. Large banks’ participation played a crucial role in broadening the funding pool and supporting credit growth and margins during that period.
