'Don't assume FCNR money is untouched': ISB professor flags RBI's $200 billion exposure

His proposal comes as India's forex reserves have fallen to $721.016 billion, down nearly $65 billion from their September peak, following record inflows through a special concessional swap facility for foreign currency deposits from the Indian diaspora.

"The RBI’s net forward dollar short position has reached $200 billion, while forex reserves have fallen from about $786 billion after the FCNR inflows to $721 billion. We cannot assume that the FCNR money is sitting untouched in reserves, ready to be comfortably returned in three years," Tantri said in a post on X.

Why the ISB professor is concerned

Tantri's warning centres on the potential currency exposure arising from foreign currency non-resident, or FCNR(B), deposits and the associated forward commitments undertaken by the central bank.

FCNR(B) deposits allow non-resident Indians to hold deposits in foreign currencies with Indian banks. Under the special swap arrangement, banks raised foreign currency funds and entered into transactions with the RBI involving future dollar obligations.

The professor cautioned against assuming that the foreign currency raised through the scheme would remain fully available in the RBI's reserves until the deposits mature. The concern is that reserves can decline in the intervening period even as future dollar commitments remain outstanding.

Proposal to convert $50 billion into rupee investments

Tantri suggested offering depositors incentives to voluntarily shift part of their foreign currency holdings into longer-term rupee-denominated investments. "We should seriously consider converting at least $50 billion of these deposits carrying exchange-rate protection into long-term rupee investments through a voluntary programme," he said.

The proposal would seek to retain overseas capital in India beyond the maturity of the foreign currency deposits while reducing the need to meet corresponding dollar commitments.

The finance professor suggested that investors could be compensated for taking on currency risk through higher interest rates on rupee deposits.

"Incentives could include higher rupee-deposit rates to compensate investors for accepting currency risk, or concessions encouraging investment in housing and equity markets. Faster approvals, priority in transparent land allocation, and lower duties or taxes could make domestic investment more attractive," he said.

Why unwinding RBI's dollar commitments matters

A central part of Tantri's proposal is that any conversion of foreign currency deposits into rupee investments should also reduce the RBI's corresponding forward dollar obligations.

Without such an adjustment, shifting the underlying investments into rupees would not necessarily remove the central bank's existing foreign currency commitments.

"These conversions must also unwind the corresponding RBI dollar commitments. The objective should be to retain capital, support investment and reduce the RBI’s currency exposure, with incentives costing less than the risks they remove," he said. "We still have time before these deposits mature. Work on a credible conversion plan should begin now."

The proposed conversion would be voluntary, rather than requiring depositors to give up their foreign currency holdings.

The RBI on Friday reported that India's foreign exchange reserves declined by $5.011 billion to $721.016 billion during the week ended October 16. In the preceding week, reserves had fallen by $8.578 billion to $726.027 billion.

The country's forex reserves had reached a record $785.706 billion in the week ended September 4, supported by substantial dollar inflows under the special concessional swap facility. Banks reportedly raised nearly $133 billion through the arrangement. Since that peak, the reserves have declined by approximately $64.69 billion.