RBI’s initiative to attract deposits from the Diaspora
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The Reserve Bank of India’s announcement on FCNR (B) deposits, made as part of the credit policy, has lifted sentiments on the forex front. Estimates of expected inflows vary from $30-100 billion. Intuitively, if even around $50 billion comes in (which looks likely based on the current data), it will mean an additional liquidity of around ₹5 lakh crore for the economy.This can be a boost to banks at a time when credit growth has outpaced deposit growth. The equation will change when the dollars are swapped for rupees by banks.Some banks are offering leverage on such deposits, provided the same is put back in these deposits. This is a unique way of garnering dollars and inducing liquidity.But there are some key issues that need to be factored in.First, since the scheme is time-bound till September, the entire flow of dollars will come in the next two months or so. Therefore, RBI’s forex reserves should increase by a similar amount in gross terms. Banks too will receive the rupee equivalent which has to be deployed. While this provides comfort, there will be time lags between their flows and their deployment over the next six months (from September-end to March-end).This will mean holding on to surpluses which will get transferred to the SDF window. The RBI would have to be active with the VRRR auctions where surpluses are transferred. The money market should see lower rates which can get reflected in bond yields, though that cannot be taken for granted.Mopping excess liquidityIn fact, there are two other options for mopping up excess liquidity.One is OMOs where RBI sell securities to banks. Simultaneously, the RBI can also choose to change the calendar for primary G-sec issuances to frontload them in October to divert these funds. The other is a temporary increase in CRR or incremental CRR, which will have monetary policy implications as it can lead to tightening of liquidity conditions.Second, FCNR (B) deposits could substitute other deposits such as the NRO deposits which are in rupees. This will also have a bearing on the overall level of NRI deposits. Outstanding NRI deposits stand at around $165 billion (₹16 lakh crore) as of April 2026 which is 6.5 per cent of total deposits in the system. Within this, FCNR was just 20 per cent of total NRI deposits, with the increase in FY26 being just $272 million. Some of the remittances may get transferred to these deposits with the interest serving as the annuity payments for recipients. Hence this will substitute domestic deposits.Third, the swap cost of the dollars is being taken on by the RBI. Assuming the cost to be around 3 per cent which is the forward rate today, it would mean around ₹15,000 crore a year, which under ceteris paribus conditions can be interpreted as a decline in net surplus which goes to the government. For the central bank, this is not really a concern though.Fourth, banks are better off; even after paying 6.5-7 per cent on these deposits the cost will be lower than on domestic deposits as these are free from the CRR and SLR. Therefore, there are gains to be made in terms of spread. The median MCLR for banks as per RBI is 8.5 per cent, which means a clear spread of 2 per cent. If the same is EBLR based lending the spread can be higher. Deploying these funds in government paper (in case the loan portfolio is not growing) may not give the same kind of returns as that on loans. This is something individual banks will be cognizant of, when structuring their interest rates and targeting flows.Fifth, the FCNR scheme allows for swapping only the principal amount and not the interest. For payment of interest of 6-7 per cent which banks are offering, appropriate hedging should be in place as this will add to the cost.Redemption factorSixth is the question of redemption of these deposits in three or five years. Now, the dollars that will come in now will be swapped with the RBI and the reserves built up. Depending on the tenures of these deposits, there could be drop in forex reserves unless there are robust inflows from exports, FPIs and FDI.The RBI will have to prepare for this and probably build buffers. This will be over and above the buy-sell swaps that the RBI has used to bolster liquidity in the market. In this process, banks will need to have liquidity to buy dollars.Last, from the point of view of the saver, these funds would be locked in for the contracted period. Hence, it becomes a premier long-term investment. So the depositors will have to contend with the tax rules in their countries regarding interest earnings. However, for those who have leveraged their deposits to take loans to invest in these deposits, the changing interest rate in the home country as well as the structuring of the leverage would be important considerations when putting their money in these FCNR deposits.The scheme introduced helps in building forex reserves and providing liquidity simultaneously. As banks swap the dollars with the RBI, the supply in the market remains unchanged so the rupee will not appreciate. However, the mechanics have to be studied for all savers and the financial system must take into account future provisions to handle redemptions. This adds to the interest in the scheme.The writer is Chief Economist, Bank of Baroda. Views expressed are personalPublished on July 28, 2026
