India draws nearly $10 billion under RBI’s deposit drive to support rupee

India has attracted roughly $10 billion in inflows through the Reserve Bank of India’s special deposit programme for overseas Indians, two people familiar with the matter said, supporting efforts to shore up FX reserves and bolster the rupee.

The RBI announced a zero-cost foreign-exchange swap facility at its June 5 policy meeting for deposits raised from non-resident Indians, allowing banks to offer higher returns on such deposits.

A June 23 ‌clarification allowed banks to lend against these deposits and place a lien against them, permitting the use of leverage that can make the programme more attractive.

Inflows have picked up over the past week after the clarification, the first source said, adding that a majority of the flows are likely to be “back-ended”, referring to the September 30 deadline for the deposits to be collected by banks.

Both sources declined to be identified since they are not authorised to speak to the media. The RBI did not immediately respond to an email seeking comment.

The funds raised so far represent only a fraction of the total inflows anticipated under the programme. Economists and bankers have estimated it could attract anywhere between $30 billion and $60 billion of foreign-currency deposits, which would help narrow India’s expected balance of payments deficit for the ongoing fiscal.

The inflows could prove particularly crucial for the rupee, which is facing renewed pressure from surging oil ‌prices and expectations that the Federal Reserve may raise interest rates later this year.

Rising hostilities between the U.S. and Iran have pushed Brent crude over 20 per cent above its recent lows, reviving concerns about India’s external finances.

The rupee, which had rallied to nearly 94 per U.S. dollar after the RBI’s measures, weakened past 96 on Tuesday. At around 96.14 per dollar, the currency is now less than 1 per cent away from its all-time low of 96.96 per dollar.

Teething issues

Bankers have, however, flagged some challenges in their efforts to attract deposits from overseas Indians, with the biggest being a 25-to-40 basis point rise in the cost of borrowing dollars after the RBI’s June 23 clarification paved the way for leveraged deposit structures.

Higher funding costs directly reduce the returns banks can offer depositors, potentially making the programme less attractive.

Lenders have also grappled with securing ‌overseas funding, with Middle Eastern and Japanese banks facing constraints on country-specific risk limits, one of the bankers said.

“The Middle East was thought to be among the biggest pools of capital for this programme,” the banker said. However, it appears it’ll be led by non-residents in ‌Singapore or Hong Kong, he added.

Two executives at mid-sized banks said the issue was not merely higher costs, but that they have effectively been priced ‌out of the market.

Further, taxation of interest income earned overseas remains a pain point, especially for non-residents living in the UK or the United States.

While interest earned from such deposits is tax-exempt in India, both countries treat the earnings as taxable, reducing post-tax ‌returns.

RBI meeting

RBI Governor Sanjay Malhotra is scheduled to meet senior executives from public and private sector banks on Tuesday, with discussions expected to include developments on the scheme, three separate bankers said.

This follows discussions between India’s finance ministry and state-run banks on Monday, during which ‌lenders reported strong interest in the programme, particularly from Indians residing in Singapore and Hong Kong.