The Reserve Bank of India has expanded its relief measures for banks raising foreign currency deposits, exempting certain loans from priority sector targets to stimulate overseas inflows, which have surged to over $40 billion.
The Reserve Bank of India has widened its temporary relief measures for banks that raise fresh foreign currency non-resident, or FCNR(B), deposits and non-resident external, or NRE, term deposits, in another sign that it is using regulatory levers to support foreign exchange inflows.
Under the latest move, loans made against fresh FCNR(B) deposits raised between June 8 and September 30 will be left out of net bank credit calculations, which means they will not count towards banks’ mandatory priority sector lending targets. The same treatment will apply to loans against NRE term deposits mobilised between June 19 and September 30. According to the RBI, the package is designed to give banks more room to attract overseas money at a time when it is seeking to strengthen foreign currency inflows.
The central bank had already exempted fresh FCNR(B) deposits, including renewals after maturity, from cash reserve ratio and statutory liquidity ratio requirements. It has also allowed banks to swap FCNR(B) deposits raised under the special measures with the RBI through a zero-cost hedging facility, which remains open until September 30.
The incentives appear to be drawing a strong response. RBI data showed that the special measures had brought in $40.81 billion in foreign exchange by July 31, with FCNR(B) deposits accounting for $36.72 billion. That comfortably exceeds the $26 billion mobilised under a similar initiative in 2013.
For banks, the policy eases a key constraint. India requires lenders to direct at least 40% of net bank credit towards priority sectors such as agriculture, micro, small and medium-sized enterprises, export credit, education, housing and weaker sections. By excluding certain loans linked to fresh FCNR(B) and NRE deposits, the RBI is effectively making those funds easier to raise without tightening compliance pressure elsewhere in the balance sheet.
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