India draws record $127 billion through forex deposits: RBI

By August 31, foreign currency non-resident (Bank) deposit scheme inflows through the Reserve Bank of India (RBI) had surpassed $100 billion, indicating strong overseas investor and non-resident Indian interest. The RBI's special swap facility also lured funds via external commercial borrowings (ECBs) and overseas foreign currency borrowings (OFCBs), as reported by the Financial Times.

The FCNR(B) facility concluded on Monday, but banks will continue receiving RBI support through swap arrangements for pre-contracted deposits until September 11. These swap agreements have three to five-year maturities, with most raised via five-year arrangements. The RBI's Forex Swap Facility attracted $73 billion in inflows, surpassing initial expectations of around $80 billion. The strong response led the RBI to prematurely close the FCNR(B) window ahead of its September 30 deadline.

Although FCNR(B) deposits are no longer accepting new inflows, ECB and OFCB channels will remain operational until December 31, 2026. The RBI introduced the special swap facility on June 8, with FCNR(B) deposits commencing fund collection on June 23. Central bank data up to August 21 revealed that the three channels collectively received $72.85 billion, with FCNR(B) deposits accounting for $65.4 billion, OFCBs $4.86 billion, and ECBs $2.59 billion.

FCNR(B) offers tax-free, dollar-denominated returns to non-resident Indians, enticing overseas investors to funnel funds into the Indian banking system. RBI Governor Sanjay Malhotra deemed the early FCNR(B) window closure a well-reasoned decision based on market conditions. He described it as "well-thought-out, calibrated, prudent, and data-driven."

The substantial inflows are anticipated to bolster India's balance of payments during the current fiscal year. This follows a nearly $8 billion dip in foreign exchange reserves during the April-June quarter. Estimates suggest the capital account surplus could exceed $65 billion in the current financial year, reversing deficits from the past two years.

However, the RBI has also cautioned about the challenges of managing large foreign currency inflows. Malhotra noted that the benefit from each additional dollar received through the swap facility diminishes over time, while excess liquidity management costs rise as funds remain in the system longer.