The Reserve Bank of India (RBI) has initiated discussions with commercial banks regarding the slower-than-expected inflows into its foreign-currency non-resident (FCNR-B) deposit scheme, which was launched in June. The scheme aims to attract $30-40 billion in deposits but has so far only gathered around $7 billion, according to market participants. This is significantly less than the $26 billion raised during a similar initiative in 2013.
Background on FCNR Scheme
The FCNR-B deposit scheme was introduced to stabilize the Indian rupee amid rising crude oil prices and foreign fund outflows. Under the plan, the RBI absorbs banks' currency hedging costs for fresh three- to five-year deposits, allowing banks to offer competitive dollar deposit rates to non-resident Indians (NRIs). During a meeting on Wednesday, RBI officials questioned bank executives about the challenges in attracting these deposits and sought to understand the current status of inflows.
Industry Response
Bank representatives indicated to the RBI that the slow pace of deposits is not unusual and that initial inflows typically take time to gain momentum. They noted that the last FCNR scheme in 2013 also experienced a slow start. One bank executive stated,
Once the policy was announced, banks will have to get the product, tie up for leverage and therefore it is taking time. Once these are sorted, flows will start coming in.
Despite the initial sluggishness, bankers expressed optimism that deposit inflows would eventually increase as the market adapts to the new scheme.
The slow inflow of FCNR deposits could impact the Indian rupee, as the scheme was designed to enhance dollar liquidity and stabilize the currency. A lack of significant inflows may lead to continued pressure on the rupee amid ongoing economic challenges. Investors will watch for updates from the RBI's upcoming bi-monthly monetary policy meeting for further insights into the central bank's strategy regarding currency stabilization.