Mumbai, India – India's special scheme for mobilizing foreign currency is on track to attract as much as $85 billion, according to a recent analysis by SBI Research. This projection holds even after the Reserve Bank of India (RBI) unexpectedly shortened the deadline for the facility by one month.
Significant Inflows Despite Shorter Window
The RBI had initially set a September 30 deadline for the swap facility associated with Foreign Currency Non-Resident (Bank) or FCNR(B) deposits. However, this was later brought forward to August 31. The window for availing swaps with the RBI was also adjusted from October 16 to September 11.
Despite this truncation, SBI Research indicates that the rapid pace of mobilization suggests the overall target will still be met. As of August 13, FCNR(B) deposits alone had already garnered $52.3 billion. Including Overseas Foreign Currency Borrowings (OFCBs) at $2.8 billion and External Commercial Borrowings (ECBs) at $1.7 billion, the cumulative inflows stood at $56.8 billion.
The report forecasts that FCNR(B) deposits could reach $65-70 billion by the scheme's end. When OFCBs and ECBs are factored in, the total mobilization is expected to climb to $80-85 billion.
Accelerated Mobilization and RBI's Recoupment
The inflow momentum has shown significant acceleration since the scheme's inception. The initial $20 billion in overall inflows took 38 days to accumulate, while the subsequent $20 billion was mobilized in just 14 days. Notably, approximately $16 billion was added between August 1 and August 13 alone.
The central bank has also been actively shoring up its foreign currency assets, recouping around $31.2 billion as of August 7. This amount represents roughly 55% of the total funds mobilized at that point, demonstrating the RBI's prudent management of the inflows.
Impact on Banking System and Rupee
These substantial foreign currency inflows are expected to significantly bolster the resources available within India's banking sector. SBI Research estimates that the conversion of these funds could inject approximately ₹8-9 lakh crore (or about $85 billion at the upper end) into the system, thereby enhancing systemic liquidity.
The surge in FCNR(B) deposits could also influence the money and bond markets. The increased stock of FCNR(B) funds may reduce banks' reliance on wholesale certificates of deposit, potentially leading to a decrease in money-market and short-bond spreads. This could, in turn, encourage banks to extend their investment durations, given their role as major holders of securities.
However, the report also observed that the impact on the Indian rupee has been less pronounced than initially anticipated. Despite record FCNR(B) inflows, the currency has faced pressure, stabilizing around ₹95-95.5 after briefly crossing the ₹96 mark. SBI Research emphasizes that a calibrated policy response from the RBI remains crucial for managing short-term currency fluctuations and maintaining overall financial stability.