The RBI’s latest FCNR-B deposit scheme is designed to attract dollars at a time when global uncertainty and crude oil volatility threaten to pressure the rupee. The central bank’s latest clarifications make one thing clear: it wants banks to mobilise these deposits aggressively.
What are the key takeaways from the FAQ? Most important, banks can lend against these deposits. This can be done either by issuing standby letters of credit or marking liens. Banks are also free to offer differential interest rates.
Also, the RBI has clarified issues relating to swap tenors and deposit structures. Let’s cut out the technicalities and look at what the regulator thinks here.
The message: Go all out!
Of course, the RBI wants banks to go out and raise foreign currency deposits aggressively. The decision to revive the FCNR-B playbook itself signals the RBI’s assessment of the risks facing the external sector.
In the backdrop of uncertain global conditions and volatile crude oil prices, this approach makes sense.
The question is whether the scheme represents a strong solution or merely a temporary source of relief.
If one looks at the past, the last major FCNR-B mobilisation exercise came during the 2013 taper tantrum when fears of a sharp reduction in US monetary stimulus triggered capital outflows from emerging markets.
Then, India was among the worst affected economies. The rupee came under severe pressure and policymakers scrambled to restore confidence.
Of course, the FCNR-B scheme succeeded. Banks mobilised billions of dollars from non-resident Indians. Foreign exchange reserves improved. Market sentiment stabilised. The rupee recovered.
But, did the programme solve the problems that made India vulnerable in the first place?
FCNR-B deposits are often mistaken for fresh capital entering the economy. Such schemes cannot replace foreign direct investment. They are deposits that strengthen reserves today but create repayment obligations tomorrow.
The point is not to undermine the value of such schemes. In periods of uncertainty, access to stable foreign currency funding matters. But, this is borrowed money.
Every dollar mobilised under the scheme eventually must be repaid. The RBI knows this. That is why FCNR-B schemes have typically been used during periods when strengthening foreign exchange reserves is considered more important than worrying about future repayment obligations.
The RBI’s latest clarifications suggest it wants banks to leave no stone unturned in attracting these deposits. That itself deserves attention.
The RBI’s willingness to provide a concessional swap window suggests it recognises that banks may otherwise be hesitant to assume the currency risks associated with large foreign-currency liabilities.
The reality is that foreign currency deposits expose banks to risks that many would prefer to avoid. The RBI’s swap window reduces that burden and makes participation more attractive.
The danger is that in our habit of celebrating foreign exchange inflows without asking whether they reflect genuine improvements in economic competitiveness.
What next?
The scheme will probably succeed in attracting dollars.
The bigger question is what happens after the dollars arrive.
If the additional breathing space is used to strengthen the economy’s external fundamentals, the scheme will have served its purpose.
The success of the scheme should not be measured by the dollars it attracts over the next few months. It should be measured by whether India uses the breathing space to reduce the need for another FCNR-B rescue a few years down the line.