India has successfully attracted a record $127 billion in foreign currency deposits from its vast diaspora through special programs, significantly surpassing market estimates. This influx, driven by aggressive pushes from lenders like State Bank of India, ICICI Bank Ltd., HSBC Holdings Plc., and Standard Chartered Plc. in major diaspora hubs such as Dubai, Singapore, and London, has provided policymakers with a formidable buffer to stabilize the beleaguered rupee. The total inflows under the Reserve Bank of India's (RBI) concessional swap facility reached $136.4 billion by August 31, with $127.2 billion specifically from Foreign Currency Non-Resident (Bank), or FCNR(B), deposits. This figure far exceeded late market expectations of $90-$100 billion, underscoring the strong response to the RBI's initiative.
The massive influx of $136.4 billion, with $127.2 billion from FCNR(B) deposits, has armed the RBI with significant firepower, leading to expectations of a further rally in the Indian rupee. The rupee is anticipated to open in the 94.30 to 94.35 range against the US dollar, up from its previous close of 94.97. This strong mobilization not only bolsters India's foreign exchange reserves but also provides the RBI with greater scope to manage pressure on the rupee. Additional funds of $3.89 billion were raised through external commercial borrowings and $5.26 billion through overseas foreign-currency borrowings, contributing to the overall $136.38 billion attracted.
The sheer scale of these inflows, however, presents a significant liquidity-management challenge for the RBI. The core banking-system liquidity could exceed ₹10 trillion (approximately $105.7 billion) in September, up from over ₹8 trillion in mid-August. This surge has led to a record-high banking system liquidity surplus, reaching ₹9.7 lakh crore ($102.67 billion) as of September 3, surpassing the previous record of ₹9.2 lakh crore in September 2021. The RBI may need to employ various liquidity absorption tools to manage this surplus and prevent it from becoming excessive, especially as consumer price inflation has started to rise. The increase in the RBI's net short dollar position in the forward market to a record $136.77 billion by the end of July also indicates the central bank's active involvement in managing the currency amidst depreciation pressures.
The record FCNR(B) mobilization also poses a challenge for banks, as the profitable deployment of such a large pool of foreign currency funds could intensify competition for high-quality borrowers. This could potentially lead to lower loan yields and a moderation in bank margins in the near term, according to Sachin Sachdeva, vice-president and co-group head, financial sector ratings, ICRA. Despite these challenges, the strong response to the facility, which saw FCNR(B) mobilization accelerate sharply from $65.4 billion on August 21 to $127.2 billion by August 31, demonstrates the global financial system's confidence in India.
