Banks and depositors are accelerating bookings for Foreign Currency Non-Resident Bank (FCNR-B) deposits as the Reserve Bank of India (RBI) has advanced the closure of its concessional swap window to August 31st. This leaves banks with only eight working days to complete transactions. The RBI's early closure decision, citing an encouraging response with $52 billion in inflows as of August 14th, has created a rush.
Market participants anticipate FCNR-B inflows could reach around $75 billion by the end of August, with an estimated $20 billion expected in the remaining eight working days. The urgency is particularly evident in the leveraged deposit segment, where demand for dollars currently outstrips availability. Many banks have waiting lists for depositors seeking leverage. HSBC Bank, for instance, offers up to 19X leverage, while HDFC Bank and ICICI Bank offer at least 9X leverage.
Some experts suggest the RBI closed the window early after achieving its target for FCNR-B inflows, aiming to prevent excess liquidity. The early closure has also prompted depositors who were initially waiting for higher interest rates to rush their requests. Axis Bank has raised its interest rate on FCNR-B deposits above $1 million to 6.40% from 6.25%, now offering the highest rate among private banks for a three-to-five-year tenor. Other banks like HDFC Bank and ICICI Bank offer 6.25%, and SBI offers 6% on similar deposits.
The current surge, which is significantly higher than the $26 billion mobilized during the 2013 FCNR-B scheme, is largely driven by leveraged deposits offering effective yields of around 14-15%. While these inflows provide a temporary boost to India's foreign exchange reserves, there is a concern that a substantial share of these funds may exit India once effective returns normalize, potentially leading to sizable outflows upon maturity. Banks are now scrambling to secure dollar funding arrangements and finalize leveraged transactions before the August 31st deadline. The influx of dollars could also pose deployment challenges for some lenders and potentially increase borrowing costs.
