The Reserve Bank of India’s special FCNR(B) swap window has mobilised $136.4 billion in foreign-currency deposits in about 90 days, giving India a much larger balance-of-payments cushion but also creating the potential for a sizeable expansion in domestic liquidity and bank credit, according to BofA Securities.
BofA has raised its forecast for India’s FY27 balance-of-payments surplus to $90 billion from $45 billion, equivalent to 2.2 percent of GDP, following the scale of inflows through the scheme. It expects the surplus to moderate to $50 billion, or 1.1 percent of GDP, in FY28 as capital flows normalise.
The immediate impact is on India’s external position. The RBI’s balance sheet has expanded by Rs 5.4 lakh crore since end-May, largely reflecting the accumulation of foreign assets. BofA expects the country’s foreign exchange reserves to cross $750 billion soon, followed by $775 billion in FY27 and $800 billion in FY28.
But the larger issue for the domestic economy is what happens to the liquidity created by the inflows.
BofA estimates that around Rs 12 lakh crore ($125 billion) of base money could enter the banking system. With a money multiplier of around four times, this could eventually support Rs 30 lakh crore to Rs 45 lakh crore of broad-money creation. Of this, the brokerage estimates that Rs 25 lakh crore to Rs 40 lakh crore could translate into additional non-food bank credit.