Uday Kotak, the founder of Kotak Mahindra Bank, has cautioned that while India’s Foreign Currency Non-Resident Bank (FCNR(B)) deposit mobilisation scheme served as a critical "insurance policy" against global economic instability, policymakers must now prepare for substantial repayment obligations. Speaking at the Business Standard BFSI Summit, Kotak noted that the total amount requiring repayment, including interest, is expected to reach between $160 billion and $170 billion over the next three to five years.
The FCNR(B) scheme, which has seen India mobilise more than $130 billion, was implemented to insulate the country against external pressures, particularly those stemming from the Russia-Ukraine war and conflicts in the Middle East. According to Kotak, these foreign currency resources acted as a necessary buffer while the nation worked to solidify its macroeconomic fundamentals. He rejected characterisations of the scheme as a mere "steroid," insisting instead that it provided India with vital time to navigate volatile international markets.
Kotak praised the Reserve Bank of India (RBI) for its tactical decision to close the scheme on August 31. He highlighted that this timing allowed the country to secure funding at more favourable rates before the sharp rise in US bond yields witnessed in September. By locking in these foreign currency funds at a relatively lower fixed rate, India successfully mitigated the impact of a volatile global interest rate environment, a move Kotak estimated saved at least 100 basis points in borrowing costs.
Despite the benefits of the scheme, the banking veteran stressed that the capital would eventually need to be returned. "We don't need to panic about it today, but we must be strategic about it," he said, advocating for careful preparation well in advance of the maturity dates for these deposits. He argued that the current three-to-five-year window must be utilised to implement deeper structural reforms rather than viewing the temporary influx of capital as a permanent economic solution.
The discussion also touched upon the competitive challenges facing India’s financial markets in the current global climate. Kotak pointed to the growing appeal of US assets, noting that when returns are adjusted for currency hedging, US Treasury bonds often appear more attractive than domestic fixed-income instruments. He explained that while a 10-year US Treasury bond yields roughly 5%, the cost of hedging into rupees is approximately 3.5%, resulting in an effective return of about 8.5% compared to the 7.4% yield typically found on Indian government bonds.
This disparity creates a tangible incentive for global investors to favour foreign currency assets, further reinforcing the need for India to bolster its own economic framework. Kotak urged that the country should shift its focus toward enhancing investments in research and technology. By developing specific industries that address global needs, he argued, India can establish itself as a significant international counterpoint, rather than relying solely on the influx of foreign capital into its domestic market.
In concluding his remarks, Kotak reiterated that the FCNR(B) scheme should not be seen as a substitute for long-term economic development. The immediate priority, he suggested, remains the strengthening of India's macroeconomic foundations. By focusing on productivity and structural growth, the country can ensure it is well-positioned to meet its external financing obligations when they eventually come due, maintaining stability even as global interest rates, inflation, and geopolitical tensions continue to shift.
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