Desperation for dollar pushing us to abyss.

Desperation for dollar pushing us to abyss. I have been trying to understand what exactly happened with RBI’s special FCNR(B) scheme, and the more I look at it, the less it seems like a simple story of “NRIs brought $127 billion into India.” It's not a small amount. How did out of nowhere such a big sum came into existence and why? A large part of these deposits was reportedly leveraged. In simple terms, an NRI could put up, say, $10 of his own money, borrow another $90 from a bank or GIFT City IBU, and place the full $100 into an FCNR deposit. The Indian bank would then swap those dollars with RBI and receive rupees. So the NRI’s actual savings may have been only a small part of the final FCNR amount. The more interesting question is where the $90 loan came from. GIFT City IBUs are heavily funded through interbank and interbranch borrowings. Some banks raised fresh dollar bonds, some borrowed from foreign banks, some used their overseas branches, and global banks like HSBC could use their own international balance sheets. So a significant part of the structure appears to be: foreign or offshore dollar funding comes into an IBU, the IBU lends it to an NRI, the NRI places it as an FCNR deposit with an Indian bank, and the bank finally gives those dollars to RBI in exchange for rupees. Once you look at it this way, the structure starts resembling foreign-currency borrowing by Indian banks, except routed through GIFT City and NRIs and made much more attractive because RBI is providing a very favourable hedge on the FCNR principal. Economically, the NRI is partly acting as an intermediary that converts wholesale dollar funding into a deposit that qualifies for the RBI facility. This also makes me think that the scheme was not only about defending the rupee. Indian banks had already been facing a structural funding problem because credit was growing faster than deposits. RBI had been supplying liquidity through other measures too. A normal rupee bond would only move existing rupees from one Indian investor to a bank. It would not bring fresh system-wide liquidity, and it would not add anything to RBI’s foreign-exchange reserves. The FCNR route does both. Dollars come in from abroad, RBI receives them, and rupees are released into the banking system. That explains why the scheme was so powerful. It gave RBI a much larger stock of dollars at a time when the rupee was under pressure, while also giving banks long-term rupee liquidity without forcing them to compete even more aggressively for domestic deposits. The subsequent liquidity surplus in the banking system shows just how large the effect was. But there is a risk hidden inside this structure. The key issue is not whether the dollars were real. The real issue is how long the original dollar funding lasts. Suppose a GIFT IBU lends $90 to an NRI for five years, but the IBU itself has borrowed that $90 for only six months or one year. The NRI’s loan remains locked for five years, but the IBU has to keep refinancing its own dollar liability every few months or every year. As long as global dollar markets remain normal, this may work without difficulty. But if foreign lenders become unwilling to roll over those loans, or if dollar funding suddenly becomes expensive, the IBU can face a dollar-liquidity problem even if the underlying NRI loan is perfectly good. The bank may be solvent but still short of dollars when its own borrowing matures. That is the part I find worrying. The original dollars have already moved through the FCNR deposit to RBI. RBI may hold them as reserves or use some of them to manage the rupee. Meanwhile, the IBU that originally borrowed the dollars may need to refinance its liability again and again until the NRI loan matures. In that sense, a dollar inflow today can create a dollar refinancing requirement tomorrow. This is why the maturity profile matters much more than the headline $127 billion figure. If most of the GIFT loans are funded by equally long three-to-five-year dollar borrowings, then the risk is fairly manageable. If a large part is funded through short-term interbank or interbranch money that has to be rolled repeatedly, then the system has effectively borrowed dollars short and lent them long. That would mean RBI may have solved an immediate domestic funding and currency-pressure problem by shifting part of the risk into future dollar refinancing. I am not saying RBI deliberately wants to create a crisis. There is no evidence for that. The more defensible concern is that a structural funding shortage in Indian banks may have been partly moved onto foreign-currency balance sheets rather than actually eliminated. The most important data now is not RBI’s reserve number or the total FCNR mobilisation. It is the bank-wise maturity structure of the dollar liabilities that funded these GIFT City loans. If the assets are five-year loans but the funding is mostly six-month or one-year money, that is where the real vulnerability lies.