RBI FCNR(B) Scheme Ends Early: Economic Impact on India

The Reserve Bank of India’s special FCNR(B) deposit scheme is nearing its conclusion, with the swap window for banks now set to close on August 31, a month earlier than initially scheduled. Banks have until September 11 to avail of the swap facility directly with the RBI.

Mobilizing Billions: The Scheme’s Impactful Inflows

The FCNR(B) deposit scheme has proven highly successful in attracting funds into India’s banking system. Its substantial mobilization efforts have significantly bolstered financial reserves.

By August 13, FCNR(B) deposits alone reached $52.3 billion.

When including overseas foreign currency borrowings (OFCBs) and external commercial borrowings (ECBs), the cumulative mobilization stood at $56.8 billion.

SBI Research projects FCNR(B) mobilization will ultimately reach $65-70 billion, with total inflows touching $80-85 billion by the scheme’s closure.

Banking System Boost: Credit and Deposit Growth

These significant inflows have had a noticeable effect on India’s banking sector. The scheme has contributed to robust credit growth and a substantial increase in overall deposit levels.

An estimated Rs 3.0-3.5 lakh crore of the rise in time deposits is directly attributable to FCNR(B) and OFCB inflows, according to SBI Research.

This has also supported strong credit growth within India’s banking system.

Bond Market Implications and Historical Context

The resulting build-up of liquidity and resources is expected to influence India’s bond markets. This could potentially lead to lower government bond yields.

The impact is anticipated particularly in the 3-7 year segment due to factors like maturity matching and reduced supply pressure.

This situation contrasts with the 2013 FCNR(B) drive, which occurred during a global financial crisis, prompting the RBI to implement liquidity tightening measures then.