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Success of RBI’s NRI deposit scheme is posing a liquidity problem

When NRIs deposit dollars and banks exchange them with the RBI, the rupees the RBI provides in return do not disappear; instead, they augment the banking system’s liquidity.

Central banks are often evaluated by the commitments they fail to uphold, rather than those they fulfil. Three weeks ago, I wrote a column on the Reserve Bank of India’s reversal of its Non-Resident Indian, or NRI, deposit scheme, retracting its decision nine days after dismissing the possibility of an early closure. This article is about what happened when the RBI kept every word of that promise, let the scheme run its full, wildly successful course, and ended up with a bigger problem than the one it started with. 

Here’s where things stand right now: On 5 August, Governor Sanjay Malhotra asserted that there were no intentions to prematurely terminate the RBI’s special NRI deposit window. At that time, inflows under the scheme were approximately $28 billion. 

By 21 August, RBI data indicated that Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits, central to the scheme, had reached $65.4 billion, with total inflows, including overseas borrowings, amounting to $72.85 billion. Upon the window’s closure on 31 August, the final RBI report recorded $136.37 billion, with $127.2 billion attributed solely to FCNR(B) deposits. This figure is nearly five times the $28-50 billion range projected by analysts at the scheme’s inception in June. In the meantime, foreign exchange reserves increased from $729.33 billion on August 21 to a new peak of $740.80 billion a week later.

Communication........

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