Nomura: India May Restart Foreign Currency Deposit Plan to Fill $68 Billion BOP Gap

Overview

This report by Nomura's Asia Economics team explores the policy prospects of India potentially restarting a historic 'foreign currency deposit mobilization plan' to address upcoming balance of payments pressures. The report notes that due to rising oil prices and slowing capital inflows, India may face a balance of payments gap as high as $68 billion in FY27. To bridge this gap, the Reserve Bank of India (RBI) and the government are evaluating measures including reinstating a 2013-style FCNR(B) swap window, removing withholding taxes for foreign investors, and issuing sovereign foreign currency bonds. The report provides a detailed review of the performance and mechanisms of three similar plans in 1998, 2000, and 2013, emphasizing that the current high-interest-rate environment differs significantly from the past, meaning the attractiveness of a new plan will heavily depend on the RBI's implicit or explicit subsidies.

Core views

India's FY27 Balance of Payments Gap Estimate and Causes: Nomura predicts that under an assumed average crude oil price of $87/barrel, India's FY27 current account deficit will widen from 1.0% of GDP in FY26 to 2.0%. This is primarily due to an expanding goods trade deficit caused by surging imports and weak exports amid the Iran war. Meanwhile, in the capital account, foreign institutional investor (FII) outflows are expected to continue, while net foreign direct investment (FDI) remains stable. Overall, the total FY27 balance of payments gap is projected at approximately $68 billion. Unless there is a major reversal in the global macro environment (e.g., a sharp decline in oil prices or a reversal of foreign capital flows), this gap must be filled through policy-driven financing measures. Review and Effectiveness of Historical Foreign Currency Deposit Mobilization Plans: The report examines India's three successful foreign currency fundraising cases. The 1998 'Resurgent India Bonds' (RIB) were launched under the dual pressures of nuclear test sanctions and the Asian financial crisis, issuing 5-year tax-free bonds to non-resident Indians (NRIs) at 7.75%-8.25% interest, raising $4.2 billion (1.0% of GDP at the time). The 2000 'India Millennium Deposits' (IMD) leveraged turn-of-the-century sentiment, raising $5.5 billion (1.2% of GDP) at 6.85%-8.50% interest. The 2013 FCNR(B) swap window, introduced during the 'taper tantrum,' was most critical: the RBI provided banks with low-cost forex swap lines at 3.5% (far below the market rate of 6-7%), incentivizing banks to absorb long-term NRI dollar deposits, ultimately raising $26 billion (1.4% of GDP). These plans shared common features: offering highly attractive risk-free yields, with the central bank bearing most of the currency hedging costs. Current Policy Options and Implementation Challenges: Market rumors suggest authorities are considering two types of plans: first, reinstating a 2013-style FCNR(B) swap window; second, issuing 5-year foreign currency bonds through state-owned banks, with RBI forex swap support, similar to the 2000 model. Additionally, there are discussions about removing the 5% withholding tax for foreign government bond investors. However, the report highlights that the current environment differs fundamentally from 2013: then, the Fed rate was near zero, whereas global dollar deposit rates are now high. This means that to maintain NRI appeal, banks' deposit absorption costs will rise significantly. For commercial banks to participate, the RBI may need to provide higher subsidies or more favorable swap terms than in 2013, increasing the central bank's balance sheet burden and policy coordination challenges.

Analysis framework

The report employs a dual analytical framework of 'historical analogy + gap estimation.' First, it uses a quantitative model to dissect India's balance of payments, deriving the FY27 funding gap ($68 billion) from bottom-up assumptions on oil prices ($87/barrel) and capital flow trends, establishing a benchmark for policy intervention necessity. Second, it applies event study methods to review the triggering conditions, tool design, and fundraising outcomes of three historical policies, extracting three success factors: 'crisis-driven,' 'NRI-targeted incentives,' and 'central bank credit backing.' Finally, it introduces a cross-cycle comparative perspective, highlighting the differences between 2013 and the current global interest rate environment, noting that simply replicating historical tools may fail and subsidy parameters must be adjusted based on new pricing benchmarks. This approach not only validates the urgency of policy implementation but also rationally assesses the marginal constraints of new plans.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Balance of payments gap as a 'demand-side' rigid constraint for forex funds

  The report treats the balance of payments deficit as an unavoidable 'demand gap' in the forex market, while foreign currency deposit mobilization plans are specific 'supply creation' tools. This methodology helps readers understand why, under specific deficit sizes, governments must actively design financial products to match funding needs rather than passively wait for market adjustments.

• Fixed Income & Credit AnalysisSpread analysis

  Dynamic balance between policy arbitrage space and central bank subsidy costs

  The report's core logic lies in analyzing the spread between 'market dollar rates' and 'policy target rates.' In 2013, the spread was large, meaning low central bank subsidy costs; currently, the spread has narrowed or even inverted, implying the same policy effect requires higher fiscal or monetary costs. This is a key perspective for understanding the sustainability of unconventional monetary policies in emerging markets.

• Macroeconomic framework

  Diaspora finance as an external financing buffer

  The report implicitly includes a special analytical dimension for emerging markets: treating overseas diaspora communities as a relatively independent, sentiment-sensitive special funding pool. When conventional cross-border capital flows are blocked, activating this 'quasi-domestic funding' is a unique macro-stabilization mechanism distinct from traditional sovereign borrowing.

Key data

• FY27 Projected Balance of Payments Gap~$68 billionNomura baseline forecast, to be filled via policy measures
• FY27 Current Account Deficit Forecast2.0% of GDPSignificantly wider than FY26's 1.0%, mainly due to oil prices rising to $87/barrel
• 1998 RIB Plan Fundraising Amount$4.2 billion (1.0% GDP)5-year tax-free bonds, 7.75-8.25% interest
• 2000 IMD Plan Fundraising Amount$5.5 billion (1.2% GDP)5-year foreign currency deposits, 6.85-8.50% interest
• 2013 FCNR(B) Plan Fundraising Amount$26 billion (1.4% GDP)RBI provided 3.5% low-cost swap window, 3+ year tenor
• 2013 vs. Current Dollar Rate Environment3.5% vs. significantly higherCurrent high global rates require higher subsidies for new plans

Impact & implications

The report argues that if India officially launches a new foreign currency deposit mobilization plan, it will help alleviate rupee depreciation pressure and replenish forex reserves in the short term, providing a buffer against FY27 external shocks. However, this also signals heightened official concerns about external imbalances. For markets, the key is to observe the swap rates or subsidy levels offered by the RBI: if subsidies are insufficient, leading to underfunding, it may trigger a second test of rupee confidence; if subsidies are too high, they may squeeze domestic liquidity or increase the central bank's financial burden. Additionally, if complementary measures like removing withholding taxes for foreign investors are implemented, they may marginally benefit foreign allocations to Indian sovereign and bank bonds.

Risks

• Higher-than-expected global oil prices further widening the current account deficit
• The Fed maintaining high rates for too long, weakening the appeal of foreign currency deposit plans
• Excessive RBI subsidy costs triggering domestic inflation or liquidity tensions
• Geopolitical conflicts escalating, accelerating capital outflows beyond model forecasts
• Delayed policy implementation or undersized plans failing to effectively fill the gap

What to watch

• Official announcement details from India's Finance Ministry and RBI on foreign currency deposit plans
• Swap rate levels and subsidy mechanisms in new RBI plans
• FY27 quarterly balance of payments data and forex reserve changes
• Brent crude price trends and their impact on import bills
• Overseas Indians' (NRI) subscription interest in new foreign currency products