India's record diaspora inflows leave RBI facing potential $10.6 bn bill

The Reserve Bank of India (RBI) is bracing for a potential cost of up to $10.6 billion following record inflows of foreign currency deposits from its diaspora population, according to a Bloomberg report. The central bank launched a special deposit programme in June, which includes foreign currency non-resident (bank) (FCNR(B)) deposits, to support the weakening rupee.

Economists estimate that the financial implications of currency swaps and managing extra liquidity in the banking system could total ₹1.2 trillion over five years. A primary challenge for the RBI is handling the additional liquidity generated when banks convert foreign currency deposits into rupees, which may require the use of various tools to maintain financial stability.

Despite these concerns, the RBI does not view the cost as a major issue at present, as officials anticipate repayment obligations can be managed due to strengthening foreign exchange reserves. Economists suggest that the final cost will depend on how foreign currency inflows are utilized; investing in overseas assets like US Treasury securities could help offset the financial burden, as 10-year US Treasuries currently offer yields of around 4.7%.

However, any reduction in the RBI's earnings could impact the dividend paid to the government, potentially making fiscal management more challenging, as the central bank paid a record ₹2.87 trillion dividend to the Centre in May.