The United Arab Emirates is emerging as the leading source of funds for India's special Foreign Currency Non-Resident (Bank) deposit scheme, with attractive dollar interest rates and favorable tax incentives drawing significant interest from clients, according to bank officials familiar with the matter.

Industry estimates suggest that more than USD 10 billion has already been mobilized from the UAE under the Reserve Bank of India's FCNR(B) initiative. The large and financially active Indian expatriate community in the Gulf nation—estimated at roughly 3.5 million people and one of the largest Indian diaspora populations anywhere in the world—is widely regarded as the primary driver of this inflow, reportedly accounting for over half of the RBI's total FCNR dollar mobilization.

FCNR(B) deposits allow non-resident Indians to maintain term deposits in foreign currencies—primarily the US dollar, British pound, euro, and Japanese yen—with Indian banks. The deposits are denominated in foreign currency, meaning the exchange rate risk is borne by the bank rather than the depositor. The RBI permits these deposits as a mechanism to attract foreign exchange inflows and bolster the country's foreign currency reserves. The current mobilization wave follows the RBI's July 2023 decision to exempt incremental FCNR(B) deposits from Cash Reserve Ratio and Statutory Liquidity Ratio requirements, a measure designed to incentivize banks to aggressively seek foreign currency deposits.

Despite the strong momentum, bank representatives have flagged operational constraints that are limiting the full potential of the scheme. Staff at Indian bank branches and representative offices in the UAE face regulatory and logistical hurdles in onboarding depositors and processing transactions, according to people familiar with the situation. These bottlenecks have prompted some industry participants to suggest that the actual flow of funds could be substantially larger if such friction were reduced. The strong showing from the UAE also reflects the deepening economic ties between the two nations, bolstered by the India-UAE Comprehensive Economic Partnership Agreement that came into force in May 2022.

The special FCNR(B) window was introduced as part of the RBI's broader efforts to shore up foreign exchange reserves and ease liquidity pressures on domestic banks. A related surge in FCNR(B) inflows through this special window is expected to help alleviate liquidity stress across the banking sector.

Meanwhile, other jurisdictions have presented their own challenges. Singapore, for instance, has maintained its position on withholding tax, creating an additional hurdle for FCNR(B) mobilization from that market.

The RBI has historically used FCNR(B) deposits as a tool to stabilize the rupee during periods of currency volatility. During the 2013 taper tantrum, the central bank launched a special concessional swap window for FCNR(B) deposits, which helped attract approximately USD 34 billion in a short span, significantly bolstering India's foreign exchange reserves at the time.

Sources: Economic Times