India's Central Bank Lures Diaspora Capital with Higher Foreign Currency Deposits

India's central bank has launched an initiative to attract capital from the country's diaspora by offering higher returns on foreign currency deposits. The Reserve Bank of India (RBI) announced that some Indian banks are currently offering returns of more than 7 per cent to non-resident Indians on US dollar fixed deposits. This is part of a scheme that will run until September 30, and the RBI has offered the full cost of hedging for lenders raising three to five-year foreign currency deposits.

The RBI Governor, Sanjay Malhotra, said this week that the measures have drawn about $40 billion between June 8 and July 26, $32 billion of which was directly from the FCNR deposit scheme. This is a concerted effort to attract capital from India's 35 million-strong diaspora.

Non-resident Indians can open Foreign Currency Non-Resident (FCNR) Bank accounts, in addition to the usual Non-Resident External (NRE) accounts. The main difference between the two types of accounts is that FCNR accounts allow holders to hold money in foreign currencies, while NRE accounts only hold savings or deposits in Indian rupees.

The benefits of an FCNR account include protection against rupee fluctuations over time, which can be especially useful for Indian residents in countries with a pegged currency like the UAE. However, it's worth noting that the scheme offering higher returns is only applicable to US dollar deposits.