FCNR(B) Deposits May Cost $5.7 bn Yearly; Negative Carry Likely

Chennai: The carry cost of the FCNR(B) deposits for the country could be around $5.7 billion annually. As deploying these funds profitably becomes difficult, there is a risk of generating a negative return on the incremental capital mobilised. Further, India recorded a Balance of Payment deficit over the 10-week period since the scheme’s inception.

Under the scheme, the RBI provided subvention covering approximately 3.5% of the cost. Banks consequently offered non-resident Indians (NRIs) dollar deposit rates of around 6.5%. After accounting for the leverage extended by banks, the effective gross cost of the deposits to the financial system is estimated at approximately 11%. For NRIs, assuming leverage of eight times, the effective return could reach around 14% over three to five years, finds Systematix Group.

The estimated cost of NRI deposit mobilisation in rupee terms is approximately 11%, compared with fresh domestic lending rates of around 8.5% and term-deposit rates of approximately 6.0%. Because NRIs can earn an effective return of around 14% through leverage, deploying these funds profitably becomes difficult for the economy as a whole.

The structure therefore risks generating a negative return on the incremental capital mobilised. A simplified estimate of the FCNR(B) ledger suggests that, after accounting for the income earned by the RBI on the additional $73 billion of FCNR(B), the carry cost for the country could be around 7.9%, or approximately $5.7 billion annually. For banks, assuming a 50-basis-point markup on lending against leveraged NRI deposits, the effective cost of the $73 billion mobilisation is estimated at around 6.1%. If the funds were deployed domestically at approximately 8.5%, banks would earn a spread of about 2.47%, marginally below the 2.54% spread currently earned over domestic term deposits.

Despite the NRI deposits mobilised through the special window, RBI’s foreign-currency assets (FCA) increased only by $38.4 billion, from $543.6 billion to $582 billion, between 5 June and 14 August. This compares lower with $56.8 billion mobilised under the FCNR(B) scheme during the same period.

The implied gap of $18.4 billion suggests that, excluding FCNR(B) mobilisation, India recorded a BoP deficit over the 10-week period since the scheme’s inception. On an annualised basis, this would amount to approximately $95.7 billion, finds Systematix.

India recorded an overall BoP deficit of USD 23.6 billion in FY26, the highest in two decades. Between April and July this year, the estimated current-account deficit (CAD) surged to $50 billion. After accounting for capital-account inflows, including foreign capital and debt flows, the estimated BoP deficit stood at $22.3 billion.