Lenders urge central bank to relax guarantee restrictions as authorities explore options to support the rupee amid external pressures
PRAVASISAMWAD.COM
As Indian authorities assess measures to support the rupee and strengthen foreign currency reserves, banks have urged the Reserve Bank of India (RBI) to ease restrictions on a key guarantee mechanism that could help attract deposits from non-resident Indians (NRIs).
The discussions come as the RBI and the government examine contingency measures to increase dollar inflows if external pressures on the Indian currency intensify. According to banking sources, the central bank recently consulted lenders on the possibility of introducing a special Foreign Currency Non-Resident (FCNR) deposit scheme, similar to the initiative launched during the 2013 currency crisis.
Bankers, however, cautioned that the FCNR route may prove expensive under current market conditions. They argued that subsidising hedging costs for foreign currency borrowings by public sector undertakings and corporates could be a more cost-effective alternative, although it may take longer to generate significant inflows.
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A key issue raised by banks was the RBI’s earlier restriction on the use of standby letters of credit (SBLCs)
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Before the restriction was imposed, overseas banks frequently used SBLCs issued by Indian lenders to extend loans to NRIs, who then placed the borrowed funds in FCNR deposits
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The arrangement significantly boosted inflows by allowing investors to leverage their deposits
Banking executives noted that without the SBLC facility, leveraged FCNR investments would be limited, reducing the attractiveness of any new deposit scheme. While the RBI never formally banned the practice, lenders were instructed to confine SBLC usage largely to genuine trade-related transactions.
The debate comes against a backdrop of concerns over elevated oil prices, geopolitical tensions in the Middle East and pressure on the rupee. Market participants have also speculated about possible measures to curb capital outflows, including tighter overseas investment limits for Indian companies. However, policymakers are believed to be cautious about introducing steps that could be interpreted as capital controls.
For now, officials appear focused on preparing policy options that can be deployed quickly if market conditions deteriorate further.
