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Informist, Thursday, Feb. 20, 2025

 

By Pratiksha

 

NEW DELHI – The Reserve Bank of India's efforts to fetch foreign exchange inflows by raising the cap on non-resident deposit rates seem to have fallen flat. A little over two months since the central bank raised the ceiling on Foreign Currency Non-Resident Accounts (Banks) or FCNR (B) deposits, a tool to support the rupee, incremental flows have barely trickled in as banks are not eager to raise their already high rates.

 

The RBI in December had raised the interest rate ceilings on FCNR (B) deposits of one to five years maturity by 150 basis points till Mar. 31. The then RBI governor Shaktikanta Das had said that the measure has been taken to attract more capital inflows.

 

An FCNR (B) account is a specialised banking facility designed to cater to the financial requirements of non-resident Indians and Persons of Indian Origin. It is denominated in foreign currencies, providing account holders with the ability to save their overseas income in foreign currencies.

 

Outstanding deposits under the FCNR (B) category rose to $32.20 billion at the end of December, up just $160 million from the previous month. Since December, the rupee has depreciated over 2.7% against the dollar primarily due to a globally strengthening dollar index and foreign portfolio outflows.  

 

Banks have now been allowed to raise fresh FCNR (B) deposits between one year and less than three years at rates not exceeding the overnight alternative reference rate plus 400 bps compared with 250 bps earlier. For deposits of three to five years, the ceiling has been increased to the overnight alternative reference rate plus 500 bps against 350 bps earlier.  

 

However, banks have refrained from opting for a hike in their FCNR (B) deposit rates as the cost of foreign deposits is already high and the RBI's Monetary Policy Committee has just embarked on a rate cut cycle, market participants said. "Why would any bank hike its rates when the rate cycle is turning and we have just had a cut? The last time RBI had given as hedging window to banks so it worked out, but this time I don't think they will. They have adequate FX reserves," said a senior treasury official at a big state-owned bank.

 

Market participants said that had the RBI made the fresh FCNR (B) deposits mobilised by banks eligible to be swapped with the central bank under its swap window to hedge foreign exchange risks, as it did in 2013, the inflows would have been significant. However, they do not expect the central bank to come up with a similar measure this time.   

 

"If RBI comes with such a measure now, markets might take it negatively and think that something is wrong. This kind of measure can come in when you actually see 89-90 (a dollar) levels (for rupee), said Ritesh Bhansali, deputy chief executive officer at Mecklai Financial Services Ltd. "I don't think RBI will be desperate to do something like this. Last time RBI came with such a provision, rupee had depreciated significantly. I think it will be a little premature for now."

 

In 2013, the RBI had given a special concessional window for swapping fresh FCNR (B) dollar funds, after giving relaxations on the same a few months back. The central bank had received over $15 billion under the said window.

 

Market participants flagged that raising the FCNR (B) deposit rate ceiling could have attracted some new inflows had the apex bank given some incentive to banks to increase rates on the same. "There was no incentive for the banks to increase their {FCNR (B)} deposit rates. If you had given an exemption on CRR (cash reserve ratio) for incremental flows, we could have seen some traction. It could have given banks around 25-27 bps of advantage," said V.R.C. Reddy, head of treasury at Karur Vysya Bank.

 

While currency market players are not surprised by the lack of fresh foreign inflows on the back of the RBI's measure, they added that the future paints a bleak picture for the Indian currency as the outlook for foreign inflows remains bleak. So far in 2025, foreign portfolio investors have pulled out $10.51 billion from the Indian markets on a net basis.

 

"Forget about money coming in, money is going out. The rupee is going to continue to be under pressure. I see no reason why rupee will take a U–turn and start appreciating," Bhansali said.   End

 

US$1 = INR 86.72

 

With inputs from Sourabh Kumar

Edited by Tanima Banerjee

 

 

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