Synopsis
The Reserve Bank of India is prematurely closing a special window for FCNR(B) bank deposits from the Indian diaspora, originally set to end September 30, now shutting on August 31. This move comes as the facility, which offered sweetened interest rates and shielded banks from currency risk and liquidity requirements, proved highly successful. The early closure is a precautionary measure due to liquidity considerations and potential adjustments to monetary policy.
A special window to raise bank deposits from the Indian diaspora at sweetened interest rates has been so successful that it is being shut ahead of schedule. Technically, RBI will stop a dollar-rupee forex swap facility to banks for fresh FCNR(B) deposits of 3-5-yr tenor.
The facility was provided from June 8 till September 30, but will now be switched off on August 31. Banks have till Sep 11 to execute their swaps with RBI. The special elements of the scheme are that RBI – not banks – will bear the currency risk, the fresh FCNR(B) deposits are exempt from bank liquidity requirements, and banks have more elbow room in deciding the interest rates offered for these deposits.
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The response to similar special offers to NRIs saving some of their income in India has been enthusiastic. This time, too, expectations were that the attractive deposit rates would draw in forex deposits above the desired objective. Since the drawdown in forex reserves since the outbreak of the Iran conflict was modest, the special deposit window was designed appropriately.
It turns out that RBI erred on the side of caution and is making suitable adjustments. These adjustments are necessary because of liquidity considerations.
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An injection of dollars into the banking system will require compensatory liquidity absorption through RBI’s open market operations. With an anticipated range of special FCNR(B) deposits, the policy response should not need to deviate much from the central bank’s monetary policy stance.
At the end of its latest monetary policy meeting on Aug 5, RBI had indicated it was not planning to close the special window before schedule. Some policy assessments were altered between then and Aug 14, when RBI announced the premature withdrawal.
The apex bank’s strategy of tapping diaspora deposits with sweeteners during extreme currency movements is well established. Since every global crisis is unique, RBI needs to fine-tune its crisis response accordingly without straying too far from the playbook.
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