India's FCNR(B) deposit scheme has attracted only $5-6 billion, significantly below the market's initial expectations of up to $70 billion. Higher US interest rates and operational hurdles are cited as key reasons for the lower-than-anticipated participation from non-resident Indians.
The Reserve Bank of India’s (RBI) latest attempt to strengthen foreign exchange reserves through its FCNR(B) deposit scheme has received a tepid response. According to a recent report by Barclays, the initiative has secured approximately $5-6 billion in deposits. This figure stands in sharp contrast to initial market forecasts, which had anticipated inflows ranging from $40 billion to as high as $70 billion.
Why Inflows Remained Low
The market’s optimistic projections were largely influenced by the success of a similar RBI scheme launched in 2013. However, the current global financial environment is significantly different. High interest rates in the United States have created attractive investment alternatives for non-resident Indians (NRIs), making them less likely to move funds into Indian rupee-denominated or foreign currency-denominated banking products.
Furthermore, the report highlights that implementation challenges, particularly regarding the use of leveraged structures and arrangements within GIFT City, may have slowed the process for potential investors. These operational difficulties appear to have created friction, preventing the scheme from reaching the scale that many analysts had previously predicted.
Impact on the Rupee and Balance of Payments
While the inflows under the FCNR(B) scheme have been lower than expected, Barclays maintains that India’s overall balance of payments—the record of all economic transactions between India and the rest of the world—remains supported by other measures taken by the central bank. Even with this support, the Indian rupee continues to face challenges.
Investors should note that the outlook for the currency remains cautious. Escalating geopolitical tensions in the Middle East and rising crude oil prices are increasing the cost of imports. As dollar importers continue to demand more foreign currency to pay for these essential goods, the rupee is expected to face continued pressure. Consequently, a trend of gradual depreciation is projected by the brokerage.
Going forward, the primary monitorable for the market will be how the Reserve Bank of India manages currency volatility in the face of these external pressures. While the FCNR(B) scheme did not deliver the massive liquidity boost some had hoped for, the focus will now likely shift to other RBI interventions, foreign exchange reserves management, and the overall trajectory of global interest rates, which continue to dictate the attractiveness of Indian financial instruments for international investors.