FCNR(B) inflows trail expectations as rupee comes under fresh pressure

Inflows into foreign currency non-resident (bank), or FCNR (B), deposits have fallen well short of market expectations so far. This has reflected in the rupee’s performance, with the currency falling over 1 per cent against the dollar this week.

After gaining 0.36 per cent in June on the back of measures announced by the Reserve Bank of India (RBI), including a special window for FCNR (B) deposits, the Indian unit came under pressure in July after international crude oil prices spiked following the resumption of hostilities between the US and Iran. The rupee underperformed most Asian currencies on Thursday, extending losses for a fourth straight session and settling at 96.35 per dollar — a nearly two-month low — against the previous close of 96.27 per dollar.

Most Asian currencies gained between 0.1 per cent and 0.4 per cent during the day, while the rupee remained among the weakest performers. “Marking its fourth straight session of declines, the rupee lost ground as the RBI’s recent support measures faded, compounded by tepid interest in FCNR schemes following a rise in global bond yields,” said Dilip Parmar, senior research analyst, HDFC Securities.

Commenting that FCNR (B) flows have been disappointing so far, Barclays, in a report, said, “The boost to sentiment emanating from the recent RBI measures to shore up India’s balance of payments and, in turn, the rupee, appears to be fading, though we think it is still too early to suggest that the measures will not be successful.”

Finance Minister Nirmala Sitharaman and RBI Governor Sanjay Malhotra separately met bankers this week to take stock of the situation. Sitharaman asked chief executive officers of state-owned banks to step up outreach to non-resident Indians (NRIs) and introduce innovative deposit products to maximise mobilisation, while bankers said they had received an encouraging response from the Indian diaspora.

Barclays said it does not expect a repeat of the large inflows registered in 2013 amid higher US rates and less attractive rupee yields. It expects $25 billion to $30 billion in FCNR inflows as a reasonable base case over the next few months, with upside risks. “We don’t expect a repeat of the large inflows registered in 2013 amid higher US rates and less attractive rupee yields. The pace of take-up so far has indeed been lower than the run rate that would be expected by the lofty market expectations of $40-50 billion,” the note said.

One of the key challenges for the FCNR (B) scheme this time, compared with 2013, is shrinking spreads. In 2026, the interest rate differential between Indian banks’ one-year FCNR (B) deposit rates and 12-month US Treasury bill yields has narrowed meaningfully. A note by BofA Securities highlighted that spreads have narrowed from 2.9 per cent in 2013 to 1.4 per cent now. BofA, however, expects overall fund mobilisation of $60 billion to $70 billion, as it expects inflows to gain momentum in the coming days.

“If you go by the 2013 story, most of the funds came in the last month,” said Madan Sabnavis, chief economist, Bank of Baroda. He said banks were still revising deposit rates based on market feedback and that the mobilisation process remained underway.

The RBI’s swap window is open until the end of September, leaving banks more than two months to raise deposits. Gaura Sen Gupta, chief economist, IDFC First Bank, said lenders were still finalising term sheets and arranging dollar funding for leveraged structures, delaying the pace of mobilisation. “Last time, 60-80 per cent of the flows came in the last month. This time, you will see a pickup in August and September,” she said.

Expectations of strong mobilisation had been built on the RBI’s decision to absorb hedging costs in full, exemptions from the cash reserve ratio and statutory liquidity ratio, the precedent of the 2013 scheme, and the potential for enhanced returns through leveraged structures.

Barclays, however, flagged the mismatch between deposit tenor and lock-in period as another structural constraint. While FCNR (B) deposits are typically raised for three to five years, depositors are generally permitted to withdraw after a one-year lock-in period, subject to individual banks’ policies. The RBI’s swap, by contrast, cannot be unwound before maturity, leaving banks exposed to residual mismatch risk should depositors exit early.