Barclays Sees FCNR(B) Inflows Falling Short of Lofty Expectations, Flags Renewed Rupee Risks

Barclays has cautioned that expectations of a surge in Foreign Currency Non-Resident Bank deposits following the Reserve Bank of India's June forex measures may prove overly optimistic, with inflows so far estimated at only $5-6 billion and unlikely to replicate the success of the 2013 scheme. 

The assessment comes nearly six weeks after the RBI unveiled a package of measures aimed at strengthening India's balance of payments and supporting the rupee. The central bank temporarily removed the interest rate ceiling on FCNR(B) deposits, allowed banks to access a concessional dollar-rupee swap facility, and exempted incremental FCNR(B) deposits mobilised under the scheme from cash reserve ratio and statutory liquidity ratio requirements until September 30.

While the measures initially improved market sentiment, Barclays said that boost now appears to be fading as the rupee comes under renewed pressure from higher crude oil prices and stronger importer demand for dollars.

"FCNR inflows have disappointed so far," Barclays said, citing reports that banks have mobilised only around $5-6 billion under the scheme, with nearly $2 billion reportedly raised by State Bank of India alone. 

Barclays noted that lenders have indicated interest from non-resident Indians across several geographies remains strong, but this has yet to translate into substantial inflows. Barclays had earlier projected a base case of $25-30 billion in FCNR(B) deposits over the coming months, significantly below market expectations of $40-50 billion, with some estimates stretching as high as $70 billion. 

According to Barclays, comparisons with the RBI's successful 2013 FCNR(B) mobilisation programme may be misplaced because global financial conditions have changed considerably.

Unlike 2013, when US interest rates were near zero and India's yield advantage was significantly wider, today's higher US cash and fixed-income yields, coupled with lower domestic bond yields following the RBI's easing cycle, have reduced the relative attractiveness of FCNR(B) deposits. Although leveraged structures can enhance returns for some investors, Barclays said these are available only to a limited set of clients and implementation has proved more complex than initially anticipated. 

Barclays also highlighted structural factors that may limit participation, including maturity mismatch risks for banks, uncertainties surrounding leveraged products and GIFT City structures, and greater diversification of overseas Indian wealth into global financial assets.

Barclays stressed that FCNR(B) deposits do not directly strengthen the rupee because banks swap the foreign currency with the RBI, increasing the central bank's short dollar forward position. Instead, the principal benefit comes through improving India's balance of payments by providing stable medium-term foreign currency funding and strengthening foreign exchange reserves. 

Despite weaker-than-expected FCNR(B) mobilisation, Barclays said portfolio flows have improved since the RBI's measures, with foreign investors returning to Indian equities and Fully Accessible Route government bonds during July. However, stronger dollar demand from importers continues to outweigh these inflows, limiting support for the rupee. 

Barclays expect the rupee to remain under pressure and reiterated its view of gradual depreciation, particularly if geopolitical tensions keep oil prices elevated.

Barclays' analysis also showed that the rupee remains among the Asian currencies most sensitive to higher crude oil prices, with the currency's responsiveness to oil shocks increasing in recent months. That leaves the rupee vulnerable should tensions in West Asia intensify further or oil prices rise sharply, adding to external sector pressures even as the RBI's balance-of-payments measures continue to attract foreign capital.