HSBC Holdings Plc has purchased at least $3 billion worth of Indian government bonds, strategically deploying a portion of the $6 billion it attracted through Foreign Currency Non-Resident (Bank) or FCNR(B) deposits. This investment is part of a broader trend where foreign banks, particularly HSBC, are funneling significant FCNR(B) inflows into government securities due to their limited capacity to absorb such large amounts through their retail and corporate lending books in India. HSBC's substantial FCNR(B) mobilization, representing a significant portion of the total $8 billion garnered by foreign banks by July-end, was facilitated by offering high leverage to depositors.
Foreign banks, including HSBC, have been active buyers of three- to five-year government securities. This influx of funds into the shorter end of the bond market has contributed to softening yields. The Reserve Bank of India's concessional swap window for fresh FCNR(B) deposits, available until September 30 for tenors between three and five years, incentivized these inflows. Overall, FCNR(B) deposits constituted $36.73 billion of the total $40.82 billion inflows under the RBI's facilities as of July 31.
The deployment of FCNR(B) funds into government bonds by foreign banks is a pragmatic move, as explained by a treasury head at a state-owned bank, given their constrained avenues for deploying this money into loans at the rapid pace it is arriving. SBI Research has since increased its projection for total FCNR(B) inflows through the window to $65 billion-$70 billion, with overall inflows including other categories potentially reaching $80 billion-$85 billion. This surge in foreign bank participation in the Indian bond market highlights the impact of the RBI's special swap window on capital flows and bond yields.
