FCNR(B) scheme: Inflows cool after netting $10 bn, Pg17

Key Highlights:

• The Reserve Bank of India (RBI)'s special Foreign Currency Non-Resident (Bank) [FCNR(B)] deposit mobilization scheme has garnered nearly $10 billion.
• Inflows have moderated after an initial surge, despite the RBI clarifying that banks could extend loans against these deposits.
• The RBI announced a special dispensation on June 5, allowing banks to mobilize fresh three- to five-year FCNR(B) deposits until September 2026.
• This dispensation includes a concessional swap facility with the RBI, covering the entire hedging cost for banks.
• Finance Minister Nirmala Sitharaman has urged banks to enhance Non-Resident Indian (NRI) outreach to sustain mobilization momentum.

Detailed Insights:

• The initial acceleration in collections followed the RBI's clarification allowing banks to extend loans against FCNR(B) deposits.
• The moderation in inflows is attributed to a 25-40 basis point increase in the cost of raising dollar funds and rising bond yields in the US and Europe.
• Geopolitical tensions in West Asia have contributed to surging crude oil prices, further impacting the Indian rupee.
• The rupee depreciated to 96.20 against the dollar, underperforming against its Asian peers, after recovering to the 94 level post-scheme introduction.
• Experts initially estimated the RBI's steps could attract an additional $50 billion to $70 billion in foreign capital.
• The RBI's absorption of the hedging burden makes FCNR(B) deposits a more attractive source of overseas funding for lenders.
• The FCNR(B) scheme aims to provide Indian banks with a stable source of overseas funding and offer NRIs tax-free returns without exchange rate risk.

Key Concepts Involved:

• FCNR(B) Deposits: Fixed-term foreign currency bank accounts opened in India by Non-Resident Indians (NRIs), allowing them to retain savings in foreign currencies without conversion to rupees.
• Basis Points: A common unit of measure in finance, equal to one-hundredth of a percentage point (0.01%).
• Hedging Cost: The expense incurred to protect an investment or financial position against potential losses from adverse market movements, such as currency fluctuations.