2 weeks ago
RBI's surprise FCNR move leaves banks scrambling, raises concerns
The Reserve Bank of India is the big bank of India, kind of like the money boss of the country.
It had a special program called FCNR (B) that let people overseas put money into Indian banks in foreign currency, with some costs covered.
The program was very popular and brought in lots of money from other countries.
Suddenly, the RBI stopped the program earlier than everyone expected.
This surprised the banks, which had been planning to keep raising money until September.
After the surprise ending, the value of India's money, the rupee, went down, and borrowing costs on some government loans went up.
Some people complained the program was too expensive, while other experts said India could easily afford it.
Banks now have to rush their paperwork and find new customers much faster than planned.
The big lesson is that when the money boss changes plans without warning, even big banks can be caught off guard.
The Reserve Bank of India unexpectedly closed its FCNR (B) swap incentive scheme earlier than expected, when banks had anticipated it would continue until September.
Markets reacted sharply, with the rupee posting its biggest decline in nearly a month and five-year government debt yields recording their biggest rise in more than a month.
The decision followed criticism over the scheme's cost, including from former RBI Governor Duvvuri Subbarao, while SBI economist Soumya Kanti Ghosh estimated cumulative costs at about $10.5 billion against reserves of around $700 billion.
The scheme has attracted about $52 billion, and bankers estimate another $25 billion to $30 billion could flow in by the end of August, potentially totalling $80 billion to $85 billion.
Banks including SBI face operational challenges from the tighter deadline; SBI had committed to raising $10 billion and had mobilised around $6 billion by the first week of August.
Economists said the abrupt reversal renewed concerns about policy communication, noting that markets find uncertainty around the policy framework harder to price than policy changes themselves.
- Who
- The Reserve Bank of India (RBI), banks such as the State Bank of India, and economists commenting on the decision.
- What
- The RBI unexpectedly ended its FCNR (B) swap incentive scheme early, triggering sharp market reactions and operational challenges for banks.
- Where
- India
- When
- Reported in August, after the scheme had been expected to continue until September.
- Why
- The decision followed criticism over the cost of the FCNR deposit scheme, though some economists argued the hedging cost was not a constraining factor given India's large foreign-exchange reserves.
Critics of the RBI's move
Supporters of the RBI's move
Cost of the FCNR (B) scheme
Critics of the RBI's move
Former RBI Governor Duvvuri Subbarao said the FCNR deposits were costly, and the scheme came in for criticism over its expense.
Supporters of the RBI's move
Economists including SBI's Soumya Kanti Ghosh and DBS Bank's Radhika Rao argued the roughly $10.5 billion hedging cost was small relative to reserves of around $700 billion and was not a constraining factor.
Early closure and policy communication
Critics of the RBI's move
The abrupt reversal renews concerns about policy communication, leaving banks that planned fundraising until September with operational challenges and tighter deadlines.
Supporters of the RBI's move
Funds raised so far, about $52 billion, were sufficient to strengthen India's balance of payments, making early closure reasonable; markets can adjust to policy changes but struggle to price framework uncertainty.
Key facts
- Institution
- Reserve Bank of India (RBI)
- Programme
- FCNR (B) swap incentive scheme
- Inflows attracted
- About $52 billion
- Estimated additional inflows
- $25 billion-$30 billion by end of August (potential total of $80 billion-$85 billion)
- Estimated scheme cost
- About $10.5 billion (SBI estimate)
- RBI forex reserves
- Around $700 billion
- SBI commitment
- $10 billion committed; about $6 billion mobilised by the first week of August
- Market reaction
- Rupee's biggest decline in nearly a month; five-year bond yields rose the most in over a month
Quotes
Soumya Kanti Ghosh
Chief Economic Adviser, State Bank of India Group
“The power of effective central bank communication lies in its ability to shape expectations and guide market behavior well beyond the immediate policy action. Markets can adjust to policy changes; what they find harder to price is uncertainty around the policy framework.”
businesstoday.in
“We don’t believe that the cost of swap could have been a constraining factor.”
businesstoday.in
Sources
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