WILL RBI ALLOW THE TRADE THAT BROUGHT INDIA $34 BILLION IN 2013?

The Reserve Bank of India's decision to absorb hedging costs on fresh Foreign Currency Non-Resident Bank, or FCNR(B), deposits has revived memories of the blockbuster 2013 scheme that brought in $34 billion of foreign currency, helping stabilize the rupee during the taper tantrum.

But the success of the latest initiative will depend less on the headline deposit rate and more on a less discussed question: whether wealthy non-resident Indians are allowed to use leverage to magnify returns.

The RBI's latest framework effectively removes a major hurdle that had discouraged banks from aggressively mobilising FCNR deposits. Banks typically incur hedging costs of about 3-3.5 percentage points when converting dollar deposits into rupee assets. By assuming those costs, the RBI allows banks to offer substantially better rates to NRI depositors.

Current FCNR deposit rates are roughly 3.5-4%. With the RBI bearing hedging costs (roughly 3%), banks could potentially offer returns closer to 6-6.5%, according to bankers and analysts.

That may be attractive, but not necessarily compelling enough to trigger a flood of money.

The economics becomes much more powerful once leverage enters the equation, said multiple bankers who did not wish to be quoted.

Brokerage estimate the scheme to potentially attract $40-50 billion of inflows, exceeding the $26 billion mobilised under FCNR deposits during the 2013 programme. Some private bankers believe inflows could be even higher.

The reason lies in a structure that was widely used during the 2013 programme.

Under that arrangement, an NRI could contribute a relatively small amount of capital while borrowing a much larger sum from an offshore lender. Indian banks facilitated the process by issuing standby letters of credit, or SBLCs, to overseas lenders, effectively reducing the lender's risk.

The borrowed funds and the investor's own capital would then be placed into FCNR deposits.

For example, an investor contributing $100,000 could potentially mobilise a $1.1 million FCNR deposit through 10-times leverage. At 15-times leverage, the deposit size rises to $1.6 million. At 20-times leverage, it exceeds $2 million.

In 2013, the returns potential was mind-boggling. According to a recent Jefferies analysis, a 5% FCNR return combined with borrowing costs of 1% could generate annual returns on investor equity ranging from 45% to 85%, depending on leverage levels.

The leverage aspect is particularly important because the macro backdrop today is very different from 2013.

Then, India enjoyed a wide interest-rate advantage over developed markets. Three-year Indian government bond yields were above 9%, while comparable US rates were below 1%.

Today, that gap has narrowed dramatically.

Jefferies estimates the spread between Indian and US three-year yields has compressed to roughly 2.4 percentage points from more than 8 percentage points in 2013. Similar compression has occurred across five-year and ten-year maturities.

That means simple carry trades are far less attractive than they were during the taper tantrum era.

The challenge could become even greater if US yields continue moving higher. Stronger-than-expected US jobs data released on Friday has reinforced expectations that the Federal Reserve may need to keep policy rates elevated for longer, limiting the attractiveness of unleveraged dollar deposits in India.

In that environment, leverage may become the decisive factor.

"The success of the 2013 FCNR-B deposit scheme was due to the ability to leverage personal funds by 10-20x," Jefferies analysts Prakhar Sharma and Vinayak Agarwal wrote in a note. They added that the RBI subsequently asked banks to refrain from offering such leverage, making regulatory clarity critical this time around.

History suggests the impact can be significant.

During the 2013 programme, banks mobilised $26 billion through FCNR deposits and another $8 billion through overseas borrowings, taking total inflows under the special swap window to $34 billion. HDFC Bank was the largest mobiliser, raising $3.4 billion, followed by ICICI Bank and State Bank of India.

Whether the latest scheme achieves similar success may ultimately depend on whether regulators permit the same playbook to be revived.

If leverage is allowed, the RBI may unlock a powerful incentive for wealthy overseas Indians to channel capital into the country. If not, the scheme could end up being little more than a moderately attractive dollar deposit product at a time when global investors have plenty of alternatives.

2026-06-08T11:10:22Z