The Reserve Bank of India’s decision to revive the Foreign Currency Non-Resident (Bank), or FCNR(B), deposit scheme does not address India’s external-sector challenges and will instead effectively finance foreign investors’ exits from Indian equities, veteran investor Shankar Sharma said.
The RBI recently announced a series of measures to attract dollar inflows, including the revival of FCNR(B) deposits. Since the announcement, Indian banks have been engaging with non-resident Indians (NRIs) and overseas lenders to mobilise foreign currency deposits and tap overseas dollar liquidity.
Sharma, however, argued that the latest scheme bears little resemblance to the FCNR(B) window introduced during the 2013 taper tantrum, when India used NRI dollar deposits to rebuild its external buffers.
The taper tantrum began in May 2013 after then-US Federal Reserve Chairman Ben Bernanke signalled that the Fed would start scaling back its bond-buying programme. The announcement triggered a sharp selloff across emerging markets, with the rupee falling nearly 19 percent between May and late August to an all-time low of Rs 68.36 against the dollar.
During that period, foreign investors pulled roughly $8 billion out of India’s debt market, while equity outflows remained relatively modest.
To stabilise the currency, the RBI, under newly appointed Governor Raghuram Rajan, launched a special FCNR(B) swap window in September 2013. The window allowed banks to mobilise dollar deposits from NRIs on attractive terms.
The scheme eventually garnered about $33 billion, helping India rebuild its foreign exchange reserves. As market sentiment improved, foreign portfolio flows reversed. Overseas investors ended FY2013-14 as net buyers of nearly $14 billion of Indian equities, while the rupee steadily recovered from its lows.
“The capital raised in 2013 remained as a reserve. Today, this capital is going to fund the exits of FIIs. It’s not a buffer anymore, it’s a liquidity tool. That’s a vastly different macro situation,” Sharma told Moneycontrol.
According to Sharma, the key distinction lies in the direction of capital flows. During FY2013-14, foreign portfolio investors bought nearly $14 billion worth of Indian equities despite the taper tantrum. In contrast, they have sold about $26.5 billion worth of Indian equities so far in FY2026-27.
“In 2013, there wasn’t a sustained FII exodus and equity inflows for the full year were actually positive. The money raised through FCNR(B) became a capital cushion, so repayment was never the issue,” he said.
“Understand one more very critical thing: in 2013, this was a capital buffer. There was no outflow of FIIs on the equity front. Overall, we ended with positive flows for the year. Only on the debt front was there a minor $3-4 billion outflow, but in equity, money came in for the full year, for 2013-14, when the taper tantrum happened. The full year was positive.”
As a result, Sharma said, the capital raised was not used to finance investor exits but remained available as a reserve.
“Understand the point: you’ve taken capital as a reserve, as a buffer, a rainy-day contingency, so redemption is not a problem. There is no risk to that.”
Today’s situation, he argued, is fundamentally different.
“Today, this capital is going to fund the exits of the FIIs. There is a major difference,” Sharma said. “There are constant FII outflows as of today. So money will come and it’ll go, but you’re left with a liability. It’s a vastly different macro situation today from what existed in 2013-14.”
According to Sharma, India is effectively borrowing dollars from NRIs while allowing foreign investors to repatriate capital.
“You are raising a liability to fund people’s exits. What nonsense is this?” he questioned.
Some market participants believe the revived FCNR(B) scheme could attract between $50 billion and $60 billion in deposits. Sharma, however, dismissed those expectations as unrealistic.
“As long as you’re borrowing dollars simply to finance exits, you’re not strengthening India. You’re only buying time,” he said. “I think it’s a damp squib. Maybe $10-20 billion comes in. It doesn’t move the needle.”