Inflows into foreign currency non-resident bank (FCNR-B) deposit have been slower than expected since the Reserve Bank of India (RBI) unveiled measures to attract overseas deposits, global brokerage Barclays said in a note on Thursday.
“The pace of take up so far has indeed been lower than the run rate that would be expected by lofty market expectations of around $40-50 billion, with some having expected inflows of up to $70 billion,” it said in a report. The brokerage, however, maintained that its own base-case estimate of $25-30 billion over the next few months remains achievable, although a stronger run rate will be required before the window closes at the end of September.
So far, inflows estimated are at around $5-6 billion, the note said. It pointed out that some of the limited inflow may have been due to earlier uncertainty about leverage and due to uncertainty over whether banks could use their GIFT City branches to mobilise deposits. “Around $2 billion of deposits may have been drawn by SBI alone,” it said.
According to Barclays, comparisons with the FCNR mobilisation drive in 2013 may be misleading. At that time, US interest rates were close to zero and the yield differential between India and the US was much wider, making FCNR deposits considerably more attractive.
“We continue to believe that the measures have taken out the tail risk from the rupee and will help turn India’s balance of payments position into a healthy surplus. However, FCNR inflows have disappointed so far,” the global brokerage said.
While FCNR inflows do not directly support the rupee, the report said that they remain important for strengthening India’s foreign exchange reserves and improving the country’s balance of payments by providing stable foreign currency funding.
It said that the sentiment around the RBI’s recent balance of payments measures has weakened as crude oil prices have climbed following renewed geopolitical tensions in West Asia. Higher oil prices and stronger US dollar demand from importers have put fresh pressure on the rupee despite an improvement in foreign portfolio inflows.
Barclays expects the rupee to depreciate gradually, warning that rising crude prices remain the biggest downside risk. Its analysis suggests the rupee is among the Asian currencies most exposed to higher oil prices, with the currency’s sensitivity to oil having increased in recent months. Escalating geopolitical tensions and potential disruptions to India’s oil imports could add further pressure.
It also pointed to improving portfolio flows, saying expectations around the inclusion of Indian government bonds in the FTSE World Government Bond Index and Bloomberg Global Aggregate Index could support more durable foreign bond inflows over time. However, it cautioned that robust dollar demand from importers continues to outweigh these inflows, keeping pressure on the rupee.
