FCNR(B) Deposits Cross $100 Billion As RBI’s Forex Inflow Scheme Gets Strong Response

Capital inflows under the Reserve Bank of India’s (RBI) Foreign Currency Non-Resident (Bank), or FCNR(B), deposit scheme crossed the $100-billion mark by August 31, highlighting strong interest from overseas investors and non-resident Indians.

The RBI’s special swap facility also attracted funds through external commercial borrowings (ECBs) and overseas foreign currency borrowings (OFCBs), according to a report by the Financial Times.

The FCNR(B) facility closed on Monday, but banks will continue to receive support through the RBI’s swap arrangement for deposits that were already contracted until September 11. These swap agreements have a maturity period of three to five years, with most funds raised through five-year arrangements.

Strong demand prompts early closure of FCNR(B) window

The total inflows through the three routes have surpassed earlier expectations of around $80 billion. The strong response prompted the RBI to shut the FCNR(B) window ahead of its original September 30 deadline.

While FCNR(B) deposits are no longer open for fresh inflows, the ECB and OFCB routes will remain operational until December 31, 2026.

The RBI introduced the special swap facility on June 8, while FCNR(B) deposits began attracting funds from June 23. Data released by the central bank until August 21 showed that the three channels had received $72.85 billion.

Of this amount, FCNR(B) deposits accounted for $65.4 billion, while OFCBs contributed $4.86 billion and ECBs accounted for $2.59 billion.

The FCNR(B) scheme offered attractive tax-free returns on dollar-denominated deposits for non-resident Indians, encouraging overseas investors to bring funds into the Indian banking system.

RBI expects boost to balance of payments

RBI Governor Sanjay Malhotra described the decision to close the FCNR(B) window early as a carefully considered move based on market conditions. He said the decision was “well-thought-out, calibrated, prudent and data-driven”.

The significant inflows are expected to strengthen India’s balance of payments position during the current financial year. The development comes after India’s foreign exchange reserves declined by nearly $8 billion during the April-June quarter.

According to estimates, the capital account surplus could exceed $65 billion in the current financial year, reversing deficits recorded in the previous two years.

However, the RBI has also highlighted the challenges associated with managing large foreign currency inflows. Governor Malhotra said the benefit from every additional dollar received through the swap facility reduces over time, while the cost of managing excess liquidity rises as funds remain in the system for longer.