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FCNR(B) Inflows Cross $100 Billion as RBI Closes Window
People living outside India put more than $100 billion into special dollar deposits at Indian banks.
These deposits are called FCNR(B) deposits.
The RBI created a swap facility to encourage money to come into India.
Much more money arrived than the earlier projection of $80 billion.
Because the response was so strong, the RBI stopped accepting new FCNR(B) deposits earlier than planned.
Banks can still finish deals that were already agreed until September 11.
The money may help India’s foreign-exchange reserves and support the rupee.
However, the RBI said each extra dollar becomes less useful over time.
It also said managing too much money can become more expensive and may create risks if funds leave quickly.
FCNR(B) deposit inflows crossed $100 billion by the August 31 deadline.
The RBI closed the FCNR(B) window ahead of its September 30 deadline after inflows exceeded the projected $80 billion across three routes.
Banks can complete swaps for already contracted FCNR(B) deposits until September 11, with maturities ranging from three to five years.
RBI data through August 21 showed total inflows of $72.85 billion: $65.4 billion through FCNR(B), $4.86 billion through OFCBs and $2.59 billion through ECBs.
The inflows could strengthen India’s balance of payments and reserves, but the RBI warned that sterilisation costs and reversal risks increase with excessive inflows.
- Who
- The Reserve Bank of India, participating banks, non-resident depositors and overseas investors; RBI Governor Sanjay Malhotra and Chief Economic Adviser V Anantha Nageswaran commented on the inflows.
- What
- Inflows under the Foreign Currency Non-Resident (Bank), or FCNR(B), deposit scheme crossed $100 billion, prompting the RBI to close the window early.
- Where
- The funds entered India through participating banks and the RBI’s special swap facility.
- When
- The FCNR(B) window closed on August 31; banks may complete swaps for already contracted deposits until September 11. The facility began operating on June 8, and FCNR(B) inflows began on June 23.
- Why
- The RBI ended new FCNR(B) inflows early because demand exceeded expectations and excessive inflows could increase reversal risks and the cost of sterilising liquidity.
Benefits of Strong Inflows
Risks of Excessive Inflows
Balance of payments and reserves
Benefits of Strong Inflows
The inflows could strengthen India’s balance of payments, increase foreign-currency assets on the RBI’s balance sheet and provide additional support for foreign-exchange reserves.
Risks of Excessive Inflows
The RBI cautioned that each additional dollar swapped provides diminishing marginal benefit, while holding and sterilising the funds for longer increases marginal costs.
Support for the rupee
Benefits of Strong Inflows
Chief Economic Adviser V Anantha Nageswaran said the mobilisation of FCNR(B) deposits provides strong balance-of-payments support and a floor for the Indian rupee against the US dollar.
Risks of Excessive Inflows
The RBI’s concern about excessive inflows includes reversal risks if the funds later leave the country.
Early closure of the window
Benefits of Strong Inflows
The strong response brought in substantially more capital than projected and demonstrated demand for the facility.
Risks of Excessive Inflows
The RBI closed the FCNR(B) window a month before the original September 30 deadline to limit the risks and rising costs associated with excessive inflows.
Key facts
- FCNR(B) inflows
- More than $100 billion by August 31.
- Total inflows through August 21
- $72.85 billion across FCNR(B), OFCBs and ECBs.
- August 21 breakdown
- $65.4 billion through FCNR(B), $4.86 billion through OFCBs and $2.59 billion through ECBs.
- Earlier projection
- About $80 billion across the three schemes.
- Swap maturity
- Three to five years, with most inflows in five-year arrangements.
- Remaining windows
- The ECB and OFCB windows remain open until December 31, 2026.
- Foreign-exchange reserves
- India’s reserves reached a record $729.33 billion in the week ended August 21.
Quotes
V Anantha Nageswaran
Chief Economic Adviser of India
“The RBI’s successful mobilisation of FCNR deposits lends a very strong level of support for the balance of payments, and also provides a floor for the Indian rupee vis-à-vis the US dollar.”
financialexpress.com
“There is a diminishing marginal utility of every dollar that is swapped. At the same time, there is an increasing marginal cost because you need to sterilise it for a longer period.”
financialexpress.com
Sources
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