India has attracted approximately $10 billion in inflows through the Reserve Bank of India’s (RBI) special foreign-currency deposit programme for overseas Indians, according to two people familiar with the matter, providing early support to the central bank’s efforts to strengthen foreign exchange reserves and support the rupee amid external pressures.
The RBI introduced the zero-cost foreign-exchange swap facility during its June 5 monetary policy meeting, allowing banks to raise foreign-currency deposits from non-resident Indians (NRIs) while offering them higher returns. The initiative is designed to encourage overseas Indians to place deposits with Indian banks, with the central bank absorbing the foreign exchange swap cost.
Momentum in the programme increased after the RBI issued a clarification on June 23 allowing banks to lend against these deposits and place a lien on them. According to one of the sources, the clarification enabled leveraged deposit structures, making the scheme more attractive for lenders and depositors. The source said inflows accelerated over the past week following the clarification and added that most deposits are expected to arrive closer to the September 30 deadline set for banks to mobilise funds under the programme.
The two sources declined to be identified because they were not authorised to speak publicly. The RBI did not immediately respond to an email seeking comment.
The funds mobilised so far account for only a portion of the inflows anticipated under the programme. Economists and bankers have estimated the scheme could attract between $30 billion and $60 billion in foreign-currency deposits. Such inflows are expected to help reduce India’s projected balance of payments deficit during the current financial year while adding to the country’s foreign exchange reserves.
The programme has gained added significance as the rupee faces renewed pressure from rising global oil prices and expectations that the U.S. Federal Reserve may increase interest rates later this year. Rising hostilities between the United States and Iran have pushed Brent crude prices more than 20% above recent lows, renewing concerns about India’s external sector. After strengthening to nearly 94 against the U.S. dollar following the RBI’s measures, the rupee weakened beyond 96 on Tuesday. At around 96.14 per dollar, the currency was less than 1% away from its record low of 96.96.
Despite the improving inflow trend, bankers said the programme continues to face operational challenges. They cited a 25-to-40 basis point increase in the cost of borrowing dollars following the RBI’s June 23 clarification, saying the higher funding costs directly reduce the returns banks can offer depositors and could limit the scheme’s attractiveness.
Bankers also said securing overseas funding has proven difficult, with Middle Eastern and Japanese banks constrained by country-specific risk limits. One banker said the Middle East had initially been viewed as a major source of capital for the programme but added that deposits now appear more likely to come from non-resident Indians based in Singapore and Hong Kong. Executives at two mid-sized banks said they had effectively been priced out of the market because of rising costs.
Tax treatment has emerged as another challenge. While interest earned on these deposits is exempt from tax in India, bankers said non-resident Indians living in the United Kingdom and the United States remain subject to taxation in their countries of residence, reducing post-tax returns and affecting the programme’s appeal.
RBI Governor Sanjay Malhotra is scheduled to meet senior executives from public and private sector banks on Tuesday, according to three separate bankers, with discussions expected to include progress under the deposit scheme. The meeting 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.
