The NRI Deposit Scheme Quietly Doing the MPC's Job For It

Who Actually Benefits When the RBI Absorbs Currency Risk

The headline number is India's 10-year yield moving just 8 basis points while peers moved 60 to 78. The mechanism behind that number is a specific NRI depositor's decision, repeated tens of billions of dollars over and it's worth tracing exactly how it works, because it explains something a repo-rate story alone wouldn't.

Normally, when an Indian bank offers an NRI a high-interest dollar deposit under the FCNR(B) scheme, the bank carries the risk that the rupee will move against it before the deposit matures - a risk banks price into the rates they're willing to offer, which usually caps how attractive those rates can be.

In June, the RBI opened a swap window that took that currency risk off banks' books entirely: banks could offer genuinely attractive FCNR(B) rates to NRIs without absorbing the hedging cost themselves, because the RBI was doing the hedging.

That single design choice is why $52.3 billion flowed in through this one channel in barely two months - money that, in a normal external-shock environment, an emerging market might instead have had to attract by raising interest rates across the board, the path South Korea, Indonesia and the Philippines effectively took as their yields jumped 60-plus basis points.

The effect cascades to people who never opened an FCNR(B) account at all. That $56.8 billion inflow didn't just sit in NRI accounts - it flowed into the banking system as deposits, pushing system liquidity to a Rs 3.2 lakh crore surplus in early August, more than double July's level.

For an ordinary business borrowing working capital, this matters concretely: with deposits flush, banks have less need to fund lending by issuing certificates of deposit in the open market, a route that gets expensive fast when liquidity is tight.

Certificate-of-deposit issuance has dropped as a direct result, which means the marginal cost of funds for banks - and by extension, the rates banks charge ordinary borrowers - face less upward pressure than they would if the RBI had instead chosen to defend the currency and manage inflation expectations through the blunter instrument of a rate hike.

This is also why the MPC's three-meeting hold looks calmer than the choice actually was. Rate decisions get made against a backdrop of what other levers are already doing the work - and with the FCNR swap absorbing external pressure that would otherwise have shown up as currency depreciation or inflationary pass-through from costlier imports, the Committee had room to treat West Asia's turmoil and El Niño's monsoon risk as watchable, not urgent.

What looks like inaction from the MPC is better read as a division of labour: while the repo rate stayed still, a targeted swap facility quietly did the stabilising work a rate hike would otherwise have had to do - with the cost, in the end, borne not by borrowers or savers broadly, but absorbed onto the RBI's own balance sheet through the currency risk it agreed to take on.