India’s much billed FCNR(B) deposit scheme was indeed a grand success with $127 bn mobilized with a short span of less than 3 months.
However, the success has become a particular point of pain for a august school of naysayers. Even though the regulator took a wise
decision to curtail the scheme preponing its closure, the mammoth fund flows eclipsed the frontier calculations, with the needle immediately shifting to the cost(s) architecture as being pushed by the lobby of naysayers.
It is a strange case indeed, in the history of financial wizardry, where a scheme meeting its KRAs/KPIs is vilified and villainized just because it exceeded its original goal by a wide pole,
through an overlapping symphony of Design and Destiny. To begin with, we test the hypotheses of august school of naysayers on four
quadrants individually and then retrace back to the overarching factors converging into pillars of resilient macros that travel beyond
what meets the ordinary eyes.
Firstly, the cost(!) of the Scheme and Benefits to Banking System. The cost and price attributed to the scheme is a distraction at best
going by common prudence and evolving landscape of elevated borrowing costs across global markets. The ‘cost’ of the FCNRB scheme
has primarily two components; interest outgoes through the contractual maturity period at contracted rates of interest and the hedging
cost. In fact, the vaulting yields in dollar terms across global markets is hovering around 7.5-8.0% for AAA rated corporates (SOFR +
Sovereign spread + Term premium + Credit risk premium) given elevated borrowings by multiple actors, thus making these deposits
at 6-6.5% quite attractive and also the elevated cost of bulk borrowing in local markets (38% through bulk deposits) should calm down
somewhat through these liquidity pools, having a sobering effect on overall systemic pricing of wholesale deposits / CDs.
Secondly, the logic of the naysayers regarding hedging cost and adding back depreciation and ascribe it to a notional loss of 5 trillion
is completely incorrect. This is because once the liabilities have been hedged by the counter parties (a back-to-back hedging is preva
lent), the direction of the currency becomes immaterial on the due date of maturity and hence double counting the same exposure (cost
of hedging PLUS cost of depreciation) does not serve any meaningful interpretation but purely a work of fiction
Thirdly, the gush of (unanticipated) liquidity is being portrayed as a challenging feat to the system. However, if we look at the levers
anchoring its end usage, there is little reason to ponder much or panic as the festive season demand, credit disbursal pipeline, new ad
vances sanctions, outflows on account of advance taxes and GST flows make it align to an elevated systemic liquidity, anchoring robust
credit management by Banks. However, there are no magic wands for Banks to cede, or put at bay their prudent risk management prin
ciples and deploy all liquidity to either advances, or deploy in G-Sec (that may distort the curve temporarily). Taking a watered down,
time lagged credit multiplier of ~2.5 these Deposits can result in additional credit of say ~Rs 25 lakh crore and an effective yield of
~7.50%, result in accretion of notional yield of Rs 1.8 trillion per annum to the banks (while interest outgo @6.5% for Rs 12 lakh cr
works to Rs 75,000 cr thus giving an effective NIM of say ~1 trillion per annum i.e. 5 trillion in 5 years, on a notional basis!
Fourthly, for the RBI , the deployment of say $100 bn globally investible avenues at a yield of say 4%, over 5 years, should accrue
profits of ~$20 Bn, which offsets the outgo on hedging ($15 Bn) and actually adds some profitability of say ~$5 Bn / Rs 50,000 crores
to the RBI B/S also at current estimates. It may be noted that RBI’s investment of the dollars received (hedge was allowed in USD only) is
open to permitted avenues as per its board approved policy only and not at the whims of the naysayers. In a high yields environment
prevailing now, current investments can even earn higher returns than what were envisaged and calculated earlier.
Thus, overall profit to Banks is a notional Rs 5 trillion and to RBI another Rs 0.5 trillion.
On another note, Japan Credit Rating Agency (JCR) upgraded India’s long-term foreign and local currency issuer ratings by one notch
from 'BBB+' to 'A-' with a stable outlook on September 2, 2026, right after the FCNRB mobilization ended. This paves the way for oth
er rating agencies to reassess (without a timeline), but the successful scheme in itself bolsters India’s rating outlook given the impetus
to its macros and how it facilitates a benign credit environment as the windfall deposits can facilitate better credit offtake (without
much dependence on foreign borrowings) and rate transmission eventually.
The august school of naysayers need to focus their limited understanding better on numbers and narratives since objects in the mir
ror may seem closer than they appear.