Why Woo NRIs With Foreign‑Currency Deposits Right Now?

'Why is India so shy of raising foreign currency sovereign bonds?' asks former finance secy Subhash Chandra Garg.

The RBI is sitting over foreign exchange reserves of nearly $700 billion. Why is India still feeling the pressure?

(Photo: Aroop Mishra/The Quint)

There is some talk about the Reserve Bank of India (RBI) opening a special window for raising Foreign Currency Non-Resident (FCNR) deposits, primarily from NRIs, on the lines of deposits raised in 2013.

The RBI is sitting on forex reserves of nearly $700 billion. Every time there is pressure on the reserves—instead of using them to protect the exchange value of rupee—a section of economists and government ministers and officials start making a case for further building them up.

I was witness to this same urge in 2018 when forex reserves had come under some pressure. Piyush Goyal, the then officiating finance minister, insisted on raising $50 billion in FCNR deposits. I was in favour of Foreign Currency Sovereign Bonds (FCSBs) instead. None happened—we ended up signing a $75 billion dollar-rupee swap with Japan.

The government curiously announced FCSBs in Budget 2019-20, which, though, was not followed through.

Why is the government feeling pressured with forex reserves at about $700 billion? Why does it make no sense to raise special FCNR deposits from NRIs? Why is India so shy of raising FCSBs?

FCNR Deposits Proposal Blocked in 2018

Officiating minister Goyal, having made up his mind to ask the RBI to raise $50 billion in FCNR deposits, asked me to initiate the process. I was not in favour as these deposits cost 1.5 to 2 percent higher dollar interest.

While I knew that Goyal had not consulted Arun Jaitley—which the order appointing him as officiating finance minister specifically mandated for important policy decisions—I wrote to the then RBI governor Urjit Patel to know whether the RBI supports it.

A meeting was held in the Prime Minister's Office (PMO). The RBI expressed their reservations. I also made my points prefacing what minister Goyal wanted. I conveyed it all to Goyal. He still wanted to pursue the proposal. When I did not take any action for a couple of days, he irritatingly ordered me to put up the matter on file. I recorded my opinion on a file opposing it and sent it to the minister’s office.

Separately, the then revenue secretary Hasmukh Adia was being pressured to bring proposals to reduce goods and services tax (GST) rates on many products by convening a GST Council meeting. Two of us met and decided to take it to Prime Minister Narendra Modi separately. (Jaitley was not accessible due to his treatment abroad.)

I sought a meeting and was granted one. PM Modi asked what the problem was. I briefed him about the additional interest cost of about Rs 5,000-7,500 crore per year, and how some powerful interests manipulate such deposits. I was asked not to do anything in the matter. Goyal did not raise it thereafter.

FCSBs in 2019

Nirmala Sitharaman announced the maiden issuance of FCSBs in her Budget speech on 5 July 2019. A storm broke out with RSS-related think tanks invoking the ghost of East India Company, as well as former RBI governor Raghuram Rajan accusing the government of selling out to foreign investment bankers.

Why did Sitharaman announce FCSBs?

A few days before the Budget, in a meeting, which Sitharaman used to convene daily, Chief Economic Advisor (CEA) Krishnamoorthy Subramanian, without any prior consultations with me, proposed issuance of FCSBs. Sitharaman appeared quite interested.

I was aware of the Bharatiya Janata Party (BJP) politicians and RSS think tanks’ dislike of FCSBs—the bonds issued to foreigners, subscribed to by them in foreign currencies, primarily US dollars, and listed on foreign stock exchanges.

I explained to her the entire background of the past unsuccessful attempts of issuing FCSBs, and the political opposition to such bonds. At the same time, I highlighted the positives of such bonds and backed the CEA’s proposal as worth pursuing. Sitharaman, who had considerable reservations about me and my advice, approved the proposal, possibly because of her confidence in CEA Subramanian.

A para was duly included in the Budget speech, which was read out aloud in two meetings chaired by the PM, with Nripendra Misra and PK Mishra present. None objected. I looked around whether there were any unspoken reservations. I did not find any. It was clear that the proposal had the endorsement.

When Sitharaman read out the para as part of her Budget speech, I felt happy that FCSBs were finally making a debut. Subramanian claimed personal credit in his interaction at the Indian School of Business, Hyderabad a day later. In my interaction with business chambers, I announced that the government intended to raise FCSBs of about $10 billion in 2019-20 (about 10 percent of total borrowings).

The government, however, developed cold feet soon, with Subramanian also disowning it. In a meeting in PMO on 2 August 2019, in which I briefed the PM about my policy reform proposals to make India a $10 trillion economy, when I asked Subramanian why he changed his opinion, he had a sheepish grin.

The proposal lapsed after I left the Finance Ministry.

Fully Accessible Route Bonds

The governments, irrespective of their political hues, feeling safe in issuing rupee-denominated government securities, or Domestic Currency Sovereign Bonds (DCSBs), have allowed foreigners to buy these bonds, taking rupee depreciation risk since the 1990s.

The foreign portfolio investors (FPIs) had been participating despite complaining against many operational problems—total subscription limit, many quotas, different dispensations for sovereign wealth funds and others, restrictions on buying securities of less than one-year maturity, restrictions of sales in certain circumstances, and so on.

The FPIs brought foreign exchange to India, converted it in rupees, and invested in the DCSBs/government securities. They are free to sell and repatriate proceeds in foreign exchange, but carried local currency risk. Many FPIs covered currency risk by hedging. For them, the net dollar return (interest rate minus hedging cost) mattered.

The government and the RBI thought of killing two birds with one stone.

In place of FCSBs and to remove restrictions on normal FPIs debt investment regime, in March 2020, the RBI came up with an alternative, albeit unglamorously worded, fully access route (FAR) scheme. The FAR securities kept the basic structure unchanged but removed many operational restrictions mentioned above.

The introduction of FAR securities led to inclusion of DCSBs/ government securities in two bond indices—the JP Morgan Government Bond Index-Emerging Markets (GBI-EM) and Bloomberg’s Emerging Market (EM) Local Currency Government Index in 2024. This inclusion was expected to bring inflows of about $40 billion. Actual experience has not been that good.

In December 2019, the FPIs owned 3.33 percent of the Central government securities. FAR route made no good immediate effect in the absence of inclusion in bond indices. In June 2020, FPI ownership came down to 1.79 percent and hovered below 2 percent for the next three years. In December 2023, it was only 1.92 percent.

Inclusion in bond fund indices improved FPI ownership, raising it to 2.34 percent in June 2024, and to a high of 3.12 percent in March 2025. There is visible plateauing and decline thereafter with their share declining to 2.8 percent in June 2025 and 2.96 percent in December 2025. Of late, the FPIs have been net sellers in government securities as well.

The enthusiasm of international bond indices' managers has clearly weakened. India was expected to be included in Bloomberg Global Aggregate Index in 2026, but this has been deferred for operational reasons.

The FAR route has proved no good alternative to FCSBs.

NRI Deposits or Sovereign Bonds?

It is quite unlikely that the Government of India will issue FCSBs, though this is primarily out of the fear of unknown, as all misgivings about these bonds are quite unfounded. There is no additional risk to India’s forex reserves stability from FCSBs.

The fact that, in all situations of stress in Indian markets, including the current one, the FPIs resort of DCSBs and repatriate proceeds create larger stress on forex reserves. That would not be the case in case of FCSBs as the foreigners buy and sell them amongst themselves with no demand on forex reserves to repatriate the proceeds.

There is absolutely no justification for the 2013-type NRI foreign-currency deposits by paying higher dollar interest of 2 percent, distorting the incentives for those who repatriate funds in rupee accounts—NRO/NRE and keep deposits in FCNR (B).

Such special schemes end up being manipulated by foreign banks and their cosy NRI clients, with these banks lending funds to the NRIs to deposit at about half of the margin, which they pocket without assuming any risk as the RBI guarantees repayment of these deposits in foreign currency.

At 2 percent interest differential for $100 billion deposits for five years, Indian taxpayers/RBI/bank depositors would be poorer by about Rs 1 lakh crore if the government undertakes this misadventure.

(Subhash Chandra Garg is the Chief Policy Advisor, SUBHANJALI, and Former Finance and Economic Affairs Secretary, Government of India. He's the author of many books, including 'The $10 Trillion Dream Dented, 'We Also Make Policy', and 'Explanation and Commentary on Budget 2025-26'. This is an opinion piece, and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)