80% of FCNR (B) inflows came via the leverage route
A significant 80% of the recent FCNR(B) inflows into India were generated through the leverage route, with five-year deposits dominating. This indicates that participants utilized average leverage of nine times to capitalize on the interest rate differential between Indian FCNR(B) deposits and overseas borrowing costs.
What this means
The high proportion of leveraged FCNR(B) inflows suggests that a substantial portion of the record liquidity is 'hot money' seeking arbitrage opportunities. This structure implies potential volatility, as these funds are sensitive to interest rate differentials and currency movements, posing a challenge for long-term liquidity management and potentially impacting future deposit stability.
Most affected: Banking system liquidity, Foreign exchange markets
Key takeaway: Assess the potential for FCNR(B) outflow risk as interest rate differentials narrow or currency volatility increases, and factor this into liquidity projections.
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