FCNR Bonanza: $136 Billion Rush Into India Puts RBI In A Tight Spot

Inflows through the Reserve Bank of India’s (RBI) concessional swap facility surged to $136.4 billion by August 31, with banks mobilising $127.2 billion through foreign currency non-resident (bank), or FCNR(B), deposits, according to data released on Wednesday.

The FCNR(B) mobilisation was far higher than late market expectations of $90-100 billion, underscoring the unexpectedly strong response to the RBI’s special funding facility.

The FCNR(B) window closed on August 31, while the facilities for external commercial borrowings (ECBs) and overseas foreign currency borrowings (OFCBs) will remain available until December 31, 2026. Banks have so far raised $5.3 billion through OFCBs and $3.9 billion through ECBs.

FCNR(B) Inflows Surge Before Deadline

FCNR(B) mobilisation accelerated sharply in the final week before the deadline, rising from $65.4 billion on August 21 to $127.2 billion by August 31.

The deposits have maturities ranging from three to five years, with the bulk of the inflows coming through five-year deposits.

“It was beyond anyone’s expectation. It shows the confidence of the global financial system in India, because ultimately money has to come to this country,” the chief executive officer of a large bank said.

The RBI had operationalised the concessional swap facility on June 8 for fresh FCNR(B) deposits, OFCBs and ECB inflows. The FCNR(B) window was initially scheduled to remain open until September 30, but the central bank advanced the deadline by a month following the strong response.

ICICI Bank said it had mobilised $17.9 billion in FCNR(B) deposits through the facility. State Bank of India has also exceeded its $10-billion mobilisation target, according to people familiar with the matter.

Funds Already Moving Into Lending

A portion of the foreign currency raised by banks is already being deployed through lending.

Public sector banks have disbursed $52.8 billion in loans through their International Financial Services Centre (IFSC) banking units at GIFT City, against sanctioned loans of $54.02 billion, according to the International Financial Services Centres Authority (IFSCA).

IFSC banking units also disbursed $11.62 billion in ECBs between April and August. Indian banks raised another $11.12 billion through bond issuances on IFSC exchanges during the same period, IFSCA said.

Liquidity Challenge For RBI

The scale of the inflows, however, presents a significant liquidity-management challenge for the RBI.

Core liquidity in the banking system had already risen above ₹8 trillion by August 15 and could cross ₹10 trillion in September.

With the liquidity impact of the FCNR(B) inflows substantially exceeding earlier expectations, the RBI is likely to use durable liquidity-absorption measures to prevent the surplus from becoming excessive.

The development comes as consumer price inflation has also started to edge higher, adding another consideration for liquidity management.

RBI’s Forward Dollar Position Rises

The impact of the swap facility is also visible in the RBI’s foreign exchange forward positions.

The central bank’s net short dollar position in the forward market rose to a record $136.77 billion at the end of July, from $103.33 billion at the end of June. The increase was driven largely by longer-tenor contracts.

Short positions with maturities of more than one year climbed to $91.54 billion from $64.21 billion over the same period.

Market participants said the increase indicates that the RBI has been more active in the forward market amid pressure on the rupee, rather than allowing existing positions to mature and potentially add to depreciation pressure.

A significant portion of the dollars raised through the FCNR(B) swap facility is borrowed and will have to be returned over the next three to five years. The RBI may therefore prefer deploying these dollars through the forward market rather than relying heavily on spot-market intervention, market participants said.

Banks Face Pressure To Deploy Funds

The sheer size of the inflows could also intensify competition among banks for high-quality borrowers.

“Given the magnitude of these inflows, its profitable deployment is likely to take some time and could intensify competition for quality borrowers. Meanwhile, the near-term impact could be lower loan yields and some moderation in margins,” said Sachin Sachdeva, vice-president and co-group head, financial sector ratings, ICRA.

For banks, therefore, the record FCNR(B) mobilisation provides a substantial pool of foreign-currency funds, but deploying those funds profitably without putting pressure on lending yields and margins could prove to be the next challenge.