Bank of America Securities forecasts foreign currency deposits under India’s FCNR(B) scheme will exceed $80 billion, driven by faster inflows following the RBI’s early closing of its swap window and supportive policy measures to bolster the country’s balance of payments.
Bank of America Securities now expects foreign currency deposits under India’s FCNR(B) scheme to top $80 billion, even after the Reserve Bank of India brought forward the close of its special swap window, according to NDTV Profit. The brokerage had previously projected inflows of $60 billion to $70 billion, but said the pace of deposits has been stronger than expected since the facility opened in June. The RBI has already received $52.3 billion through FCNR(B) deposits between June 8 and August 13, alongside smaller amounts through swap facilities for external commercial borrowings and overseas foreign currency borrowings.
The central bank’s move to advance the deadline to August 31 from September 30 shortens the period during which banks can use the zero-cost hedging arrangement. Business Standard reported that the special facility was designed to draw in foreign currency deposits and reduce pressure on the rupee by lowering hedging costs for banks. Kotak Mahindra Bank has explained that the RBI absorbs the hedging cost, allowing banks to raise fresh three- to five-year FCNR(B) deposits more cheaply than they otherwise could.
Bank of America said the inflows should help India’s balance of payments at a time when the current account has slipped into deficit. The brokerage pointed to a $3.1 billion shortfall, equal to 0.3% of gross domestic product, in the June quarter, driven mainly by a wider merchandise trade gap, though this was partly offset by stronger services exports and remittances. It said the deficit should remain moderate in the second quarter, with downside risks if exports improve further or remittance flows stay firm.
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