The Foreign Currency Non-Resident (Bank) or FCNR(B) deposit scheme mobilized a significant $127 billion in less than three months, sparking debate over its true financial impact. While some estimates point to a substantial ₹5 lakh crore loss, SBI Research, in its recent Ecowrap report, argues that these calculations are flawed, asserting instead that the scheme could generate considerable notional profits for banks and the Reserve Bank of India (RBI).
Challenging the ₹5 Lakh Crore Loss Narrative
According to SBI Research, the widely cited ₹5 lakh crore cost effectively double-counts the same foreign-exchange exposure. This estimate combines approximately ₹1.75 lakh crore in additional interest costs with an estimated ₹3.18 lakh crore from foreign-exchange depreciation, based on a presumed 5% annual depreciation of the rupee over five years.
SBI Research contends that FCNR(B) deposits were supported by a special USD-INR swap facility specifically designed to hedge against associated exchange-rate risk. Once the principal amount is hedged, any subsequent depreciation of the rupee should not be treated as an additional contractual loss for either banks or the RBI. Consequently, adding the depreciation estimate to the hedging cost constitutes a double-counting of the same exposure.
How SBI Research Estimates Profit for Banks
The report outlines a scenario where the $127 billion mobilization could significantly boost credit creation within the banking system. Utilizing a time-lagged credit multiplier of approximately 2.5, SBI Research projects that these deposits could potentially support an additional ₹25 lakh crore in credit across the banking sector.
From this additional credit, assuming an effective yield of around 7.5%, the report estimates an annual interest income of approximately ₹1.8 trillion. Against this, the interest outgo on ₹12 lakh crore (a portion of the mobilized funds) at 6.5% is estimated at ₹75,000 crore annually. This calculation leads SBI Research to an estimated effective net interest margin (NIM) of about ₹1 trillion per year, culminating in a notional ₹5 lakh crore benefit for banks over a five-year period.
Key Figures from SBI Research's Estimate for Banks:
- FCNR(B) deposits mobilised: $127 billion
- Estimated credit multiplier: ~2.5x
- Potential additional credit: ~₹25 lakh crore
- Effective yield on additional credit: ~7.50%
- Annual interest income/yield generated: ~₹1.8 trillion
- Annual interest outgo on ₹12 lakh crore (at 6.5%): ~₹75,000 crore
- Estimated effective Net Interest Margin (NIM) per year: ~₹1 trillion
- Notional benefit over 5 years: ~₹5 trillion (₹5 lakh crore)
Potential Gains for the Reserve Bank of India
Beyond commercial banks, SBI Research also identifies a potential benefit for the RBI. The report assumes that around $100 billion of the mobilized funds could be strategically deployed through globally investable avenues, yielding approximately 4% over five years. This could generate about $20 billion. After offsetting an estimated $15 billion in hedging costs, this would leave an approximate $5 billion, or ₹50,000 crore, in potential profitability for the RBI's balance sheet.
Questioning Rupee Depreciation Assumptions
The SBI Research report further challenges the assumption of a sustained 5% annual rupee depreciation, describing it as a relatively severe scenario compared to historical trends. Under a more conservative 3% annual depreciation assumption, the report estimates the rupee could reach around ₹110 per US dollar by 2030, a less extreme outcome than the ₹120-125 projected under the 5% assumption.
Important Disclaimer
It is crucial to note that SBI Research explicitly presents these estimates as notional calculations, reflecting the specific assumptions used by its research team. The report includes a disclaimer stating that these views are those of its research team and do not necessarily represent the official stance of the bank or its subsidiaries.