Samir Arora, founder and fund manager at Helios Capital, has strongly urged the Reserve Bank of India (RBI) to consider closing its Foreign Currency Non-Resident (Bank) or FCNR(B) deposit mobilisation scheme early. Despite significant inflows pushing deposits to $60 billion, Arora cautioned against further expansion, suggesting the RBI should signal confidence in India's external financial position by capping the scheme.
Arora's Call for Early Closure
In a recent statement, Arora highlighted that market participants are speculating about a much larger raise, potentially reaching $80-90 billion under the FCNR(B) scheme. However, he advocated for the RBI to halt the scheme around the current $60 billion mark. His reasoning is that an early closure would demonstrate India's capability to attract funds during a crisis at short notice, and crucially, its position to even decline additional foreign currency inflows.
"With the success of the FCNR deal so far, markets are talking about a much larger raise (maybe US$ 80-90 billion). I hope RBI does not do that and in fact closes the scheme early at say US$ 60 billion (or whatever) to signal that India can raise money during a crisis at short notice and is in fact in a position to even refuse USD coming in," Arora stated.
Proposed FCNR Redemption Reserve
Beyond an early closure, Arora also put forth a critical suggestion for the RBI: establishing a dedicated FCNR redemption reserve. This reserve would be designed to prepare for the repayment of these deposits as they mature over the next three to five years. He proposed setting aside approximately $3 billion per month to cover future principal and interest obligations.
According to Arora, proactively managing these future repayments with a defined reserve would prevent market anxieties about large foreign currency outflows closer to the maturity dates. He further argued that India's foreign exchange reserves should be reported net of this reserve, reflecting a more accurate picture of the country's net financial strength given these known future obligations.
Context of the FCNR(B) Scheme
The RBI introduced a special US Dollar-Rupee forex swap facility on June 8 to encourage banks to attract fresh FCNR-B deposits. This initiative, aimed at bolstering India's balance of payments, boosting foreign exchange reserves, and easing pressure on the Indian rupee, applies to deposits with a tenure of three to five years. The facility is set to remain available until October 16 for deposits mobilised between June 8 and September 30.
Since its launch, the scheme has seen a rapid increase in deposits. Data from the Finance Ministry indicates that outstanding FCNR(B) deposits surged from $32.56 billion on June 5 to $60.55 billion by July 30, marking an 86% jump.
What are FCNR(B) Deposits?
FCNR(B) deposits allow Non-Resident Indians (NRIs) to maintain fixed deposits with Indian banks in major foreign currencies, such as the US dollar. Key benefits include earning potentially higher interest rates, hedging against rupee depreciation risk (as both principal and interest remain in the foreign currency), and generally enjoying exemption from Indian income tax for eligible NRIs.