Analysts believe the steps announced on June 5 could strengthen the rupee, support bond markets, improve India’s external account position and enhance the country’s prospects of inclusion in broader global bond indices.
According to a report by SBI Research, foreign currency non-resident bank [FCNR(B)] deposit inflows could potentially exceed the $34 billion mobilised under a similar scheme introduced in 2013. The report highlighted that investments under the Fully Accessible Route (FAR) currently stand at ₹3.24 lakh crore, representing only 6.8% utilisation of the available limit.
SBI Research said that the inclusion of new 15-year, 30-year and 40-year government securities has expanded the FAR investment universe by around ₹1.5 lakh crore. In addition, the RBI’s decision to remove the 30% cap on short-term foreign portfolio investor (FPI) bond investments is expected to increase participation from overseas investors.
The report estimates that FPIs currently have investment headroom of nearly ₹4.06 lakh crore in the bond market. Tax-related exemptions could further enhance investor returns by more than ₹5,000 crore annually, potentially boosting the attractiveness of Indian debt instruments.
Bond index inclusion prospects improve
Analysts at Deutsche Bank said the latest policy measures improve the likelihood of India being included in a wider set of global bond indices.
The brokerage estimates India’s current account deficit (CAD) for FY27 at around 2% of GDP, or approximately $83 billion, assuming crude oil prices average $95 per barrel. However, higher import duties on gold could reduce imports by nearly $10 billion, narrowing the current account deficit to around $73 billion.
Deutsche Bank estimates that, without the latest measures, India’s balance of payments (BoP) deficit could have reached $43 billion in FY27. Additional foreign exchange inflows of $40-50 billion could potentially bridge most of this gap.
FCNR(B) deposits back in focus
Analysts at Macquarie believe the government’s and RBI’s initiatives could attract $40-50 billion of fresh foreign exchange inflows, with FCNR(B) deposits likely to play a central role.
The brokerage said that FCNR(B) deposits currently offer returns of roughly 3.5%, while currency hedging costs are around 3%. Domestic three-year deposits, meanwhile, offer returns of about 6.5%.
Macquarie said RBI support on hedging costs could enable banks to offer FCNR(B) deposit rates closer to 6%, making them significantly more attractive to overseas depositors.
Lessons from 2013
Analysts at Jefferies drew parallels with the FCNR(B) mobilisation scheme launched in 2013, which attracted approximately $34 billion in inflows.
According to Jefferies, those inflows were equivalent to around 12% of India’s foreign exchange reserves and nearly 3% of the banking system’s deposits at the time.
The brokerage cautioned that the success of the current initiative will depend on the final deposit leverage rules and prevailing market conditions. It also noted that a narrower India-US interest rate differential compared with 2013 could limit the scale of inflows this time around.
Jefferies added that banks such as HDFC Bank and ICICI Bank were among the biggest beneficiaries of the 2013 FCNR(B) mobilisation programme and could remain key participants if inflows gather momentum again.
