Attractive dollar returns
One of the biggest reasons behind the strong inflows is the return investors can earn.According to Shah, investors can borrow dollars at around 4.5-5%, while FCNR deposits currently offer interest rates of 6-6.5%. Banks also allow investors to use leverage of nine to 15 times, significantly boosting potential returns.
“As I do the math, the return on dollar perspective for an investor can be upwards of 10-14%, and it can go closer to 17-18% also,” Shah said.
No currency risk
FCNR deposits are fixed deposits that Non-Resident Indians (NRIs) can place with Indian banks in foreign currencies such as the US dollar. Since the deposits are held in foreign currency, investors do not face the risk of losses from rupee depreciation.To encourage banks to mobilise these deposits, the RBI has introduced temporary regulatory relaxations, making it easier for lenders to raise overseas funds.
A strong start could lead to bigger inflows
The early response has strengthened Shah’s conviction that FCNR deposits could reach $60-70 billion before the September deadline.
“We believe so… we’ll probably get around $60-70 billion as part of FX flows… and we continue to believe that with the bumper start,” he said.
He also expects Indian and foreign banks to contribute almost equally to the final inflows, similar to the trend seen during the 2013 FCNR scheme.
Why it matters
Every dollar mobilised through FCNR deposits adds to India’s foreign exchange reserves, helping strengthen the country’s external finances at a time when higher crude oil prices have increased demand for dollars.
The RBI introduced the concessional swap facility in June to encourage foreign currency inflows and strengthen India’s external buffers.
