'Close the scheme early': Helios Capital's Samir Arora cautions RBI as FCNR deposits reach $60 billion

Helios Capital founder and fund manager Samir Arora on Tuesday urged the Reserve Bank of India (RBI) not to significantly expand its FCNR(B) deposit mobilisation despite strong inflows. He said the central bank should instead consider closing the scheme early to signal confidence in India's external position.

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The inflow under the FCNR(B) scheme has already touched $60 billion, and market participants are speculating that deposits could rise to as much as $80-90 billion.

However, Arora said the RBI should stop at around $60 billion, or whatever level it considers appropriate.

"With the success of the FCNR deal so far, markets are talking about a much larger raise (maybe US$ 80-90 billion)," he wrote in a post on X. "I hope RBI does not do that and in fact closes the scheme early at say US$ 60 billion (or whatever) to signal that India can raise money during a crisis at short notice and is in fact in a position to even refuse USD coming in."

SUGGESTS REDEMPTION RESERVE

Arora also proposed that the RBI create a dedicated FCNR redemption reserve to prepare for repayments when the deposits mature in three to five years.

He said markets could begin worrying about large foreign currency outflows well before the deposits mature, potentially turning them into a source of uncertainty.

"I suggest that the RBI make a clearly defined FCNR redemption reserve where they put aside US$ 3 billion a month (or whatever number is required over 3/5 years) to cover repayment of principal plus interest," he said.

The veteran fund manager added that India's foreign exchange reserves should be reported net of this reserve, arguing that the repayments are a known future obligation.

"Everyone knows that the funds have to be repaid in a fixed period, so effort should be to manage the market from today so that it does not make it a big issue when maturity comes near," Arora said.

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FCNR DEPOSITS SEE SHARP RISE

The RBI launched a special US Dollar-Rupee forex swap facility on June 8 to encourage banks to mobilise fresh FCNR-B [Foreign Currency Non-Resident (Bank)] deposits and attract foreign currency inflows.

The facility applies to deposits with a tenure of three to five years and will remain available until October 16 for deposits mobilised between June 8 and September 30. The move is aimed at strengthening India's balance of payments, boosting foreign exchange reserves and easing pressure on the rupee.

Since the scheme was introduced, deposits under the scheme have risen sharply. According to data tabled in the Lok Sabha by the Finance Ministry, outstanding FCNR(B) deposits increased from $32.56 billion on June 5 to $60.55 billion on July 30, an 86% jump.

WHAT IS FCNR(B)?

FCNR(B) allows NRIs to keep fixed deposits with Indian banks in foreign currencies such as the US dollar.

Under this scheme, an NRI can place money in a fixed deposit with an Indian bank for a specified period (usually 3-5 years), earn higher interest, and avoid the risk of rupee depreciation because both the principal and interest remain in the foreign currency. The deposits and interest are also generally exempt from Indian income tax for eligible NRIs.