FCNR(B) Inflows May Cross $80 Billion Despite Early RBI Swap Window Closure

Foreign currency inflows through FCNR(B) deposits could exceed $80 billion despite the Reserve Bank of India (RBI) bringing forward the closure of its special swap window, according to a report by Bank of America (BofA) Securities.

BofA Securities has raised its earlier estimate of FCNR(B) inflows from up to $70 billion to more than $80 billion, citing stronger-than-expected flows since the facility was introduced.

“We revise this up to the $80 billion+ given stronger flows,” the brokerage said.

The RBI had initially allowed banks to use the zero-cost hedging facility for FCNR(B) deposits until September 30. However, following robust demand, the central bank advanced the deadline to August 31.

While the earlier closure means the total inflows are likely to remain below what could have been achieved if the window had remained open until September, BofA still expects the final figure to comfortably surpass its previous forecast.

Data cited by the brokerage showed that banks received $52.3 billion through FCNR(B) deposits between June 8 and August 13. During the same period, the RBI also received $1.7 billion through swap facilities linked to external commercial borrowings and another $2.8 billion through overseas foreign currency borrowings by authorised lenders.

The strong response to the FCNR(B) facility is significant because such foreign currency deposits can bring additional foreign exchange into the banking system and help strengthen India's external position.

BofA said the foreign currency inflows could provide support to India's balance of payments at a time when the country's current account has moved into deficit.

India recorded a current account deficit of $3.1 billion, or 0.3 per cent of GDP, during the April-June quarter. According to the brokerage, the deficit was mainly driven by a widening merchandise trade gap, although stronger services exports and remittance inflows provided some offset.

The brokerage expects India's current account deficit to remain moderate in the second quarter. It also said the deficit could turn out to be lower than expected if merchandise exports improve or remittance inflows remain strong.

The latest FCNR(B) flow estimates therefore offer some cushion to India's external accounts. While the early closure of the RBI facility limits the potential upside, the pace of deposits recorded so far indicates that overseas foreign currency flows remain strong and could provide meaningful support to India's foreign exchange position.