BFSI Insight Summit 2026: FCNR(B) bought India 3-5 years, says Uday Kotak

Veteran banker Uday Kotak on Monday cautioned that India must prepare for a repayment obligation of $160-170 billion over the next three to five years as foreign currency non-resident (bank), or FCNR(B), deposits mature. He said the inflows had bought the country time but had not eliminated its underlying macroeconomic (macro) challenges.

Describing the scheme as a “strong insurance policy” against global economic and geopolitical uncertainty, Kotak said the Reserve Bank of India (RBI) and the government had acted at the right time to bolster the country’s foreign currency resources. However, policymakers, banks, and businesses must use the intervening period to prepare for the eventual repayment of the deposits and interest.

The RBI launched a special dollar-rupee swap facility on June 8 to attract foreign currency inflows, strengthen the country’s external buffers, and support the balance of payments amid global uncertainty and pressure on the rupee. The facility reduced banks’ currency hedging costs, making it more attractive for them to mobilise overseas deposits.

Banks mobilised $132.98 billion through FCNR(B) deposits under the facility by August 31, according to the RBI. Including overseas foreign currency borrowings and external commercial borrowings, total inflows under the broader facility reached $143.6 billion by September 18. The RBI closed the FCNR(B) window a month ahead of its original deadline following the strong response.

The deposits, which have tenures of three to five years, will eventually have to be repaid along with interest, creating a sizeable future foreign currency outflow. “We have bought ourselves three to five years with the FCNR(B). All policymakers and practitioners have to keep in mind… that the end date also comes. This will mature,” said Kotak, founder and non-executive director of Kotak Mahindra Bank, at the Business Standard BFSI Insight Summit in Mumbai.

He said the repayment obligation could reach $160-170 billion, including interest, and called for a strategy to prepare for the outflows. “We don’t need to panic today, but we must be strategic about how we build India’s economic and financial structure for the time that will inevitably come,” he said.

Kotak also commended the RBI for closing the FCNR(B) mobilisation window on August 31, saying India had locked in dollar funding before US bond yields rose sharply in early September. The five-year and 10-year US Treasury yields crossed 5 per cent after the wind­ow closed, he said. “India locked in foreign currency deposits relatively cheaply. Today, it would probably have cost us at least 100 basis points more,” he said.

However, he flagged a disparity between returns on fully hedged US government bonds and Indian government securities. A 10-year US Treasury yield of around 5 per cent, combined with a currency hedge costing about 3.5 per cent annually, translated into a rupee return of 8.5 per cent, compared with around 7.4 per cent on India’s 10-year government bond.

“The arbitrage favours foreign currency over domestic interest rates,” he said, adding that the relative attractiveness of interest rates could influence financial flows. 

Kotak called for a narrower gap between the tax treatment of interest income and capital gains, arguing that the difference was encouraging disproportionate investment in equity-oriented instruments while making deposits less attractive to larger savers. “Thirty-nine per cent versus 14-odd is a very wide gap,” he said, referring to the tax rates faced by some larger investors on interest income and capital gains.

He welcomed the government’s decision to make income of up to ₹12 lakh tax-free under the new tax regime, saying it would help smaller savers keep their money in bank deposits. However, he said the larger pool of savings needed more attractive interest-earning instruments. “The gap needs some reduction. It can never be zero, because equity risk is higher than debt risk. But 14 versus 39 is too wide, in my view,” he said.

The tax differential, he argued, was contributing to a shift towards equity-oriented investments, even as foreign portfolio investors (FPIs) continued to sell Indian assets. Domestic investors were effectively providing an exit route for overseas investors, he said.

Kotak observed that India’s price-to-earnings (P/E) ratio was the second-highest globally after that of the US, while Chinese P/E ratios were around half those of India. “I am not saying Indian markets are expensive, because India gives growth and stability,” he said, adding that India had stronger growth prospects than some competing markets, including China.

However, he said Indian companies needed to grow faster in terms of revenue and earnings to sustain their valuations. He estimated that FPIs held around $700 billion in Indian assets, while the total stock of foreign investment, including foreign direct investment, stood at about $1.5 trillion.

“We need to think about our tax structures, interest rate structures, and capital gains structures, because we may get equity investors in rupees, but the foreign investor exits in dollars,” he said.

Indian companies needed to invest in future-ready businesses and sectors, as well as in research, technology and innovation, to support stronger growth, he added.

Kotak also flagged gold imports as a source of pressure on India’s external position, particularly at a time when foreign portfolio flows were under pressure.

He cited a current account deficit (CAD) of $26 billion for the year ended March, against gold imports of $72 billion. Excluding gold, India would have been in current account surplus, he said.

For the year ending March 2027, gold imports could rise to $90 billion, while CAD affected by oil imports, could wid­en to $60-65 billion, he said. “Even in this high-oil scenario, India would be in current account surplus but for gold,” he said.

Kotak distinguished between households holding gold as a store of wealth and the financialisation of gold through investment products such as mutual funds and exchange-traded funds (ETFs).

“I do believe every Indian has a right to buy gold, particularly the Indian housewife, who is the backbone of India for her wealth and her protection,” he said.

However, he cautioned against financialising gold at a time when India faced challenges on its capital and current accounts. He also questioned why financing against gold was easier than lending against shares.

Loans against shares, he said, were subject to a 50 per cent margin requirement and a ₹1 crore limit. Gold financing, by contrast, could cover 75-80 per cent of the collateral value, with no comparable limits.

“All I am saying is that we have made the financialisation of gold so significant that it has become a financial instrument rather than an instrument of household savings,” he said.

Continued gold imports, combined with pressure on portfolio flows, could put the rupee under strain, he said. Kotak argued that the exchange rate should increasingly be determined by market forces rather than by the perception that policymakers were trying to keep it below a particular level.

“Then we give global financial players a very easy game of chicken. We should be careful about that,” he said.

Asked what could complement the temporary support from FCNR(B) deposits, Kotak said India needed to strengthen its fundamentals and invest in areas that would be important to the global economy. “In these three to five years, we need to focus on what the world wants from India. We must have our economic negotiating leverage,” he said.

He cited international interest in India’s refining capacity as an example of how the country could strengthen its strategic position. India needed to become a country the world depended on for critical goods and services, rather than merely a market for global businesses, he said.

“It is time for Indian business to say we will get ourselves counted: what are we doing to make ourselves required by the world?” he asked.

Kotak said India needed to build strength in a few strategic areas over the next five years. Businesses, he added, should invest more in research, technology and innovation, with the financial sector supporting these efforts.

He also called for greater support for what he described as the “missing middle” in Indian entrepreneurship. While the country had a strong start-up ecosystem and large companies making substantial investments, the middle layer needed support to develop the businesses of the future.

“Startups have to get big, or the large players have to get into areas that are critical for India’s strategic needs,” he said.

Turning to the banking sector’s credit-deposit mismatch, Kotak said FCNR(B) inflows had given lenders time to address the gap between loan growth and traditional deposits. “₹13 trillion 

has come into the banking system, giving banks stability to continue their business over the next three or four years while we solve the deposit puzzle,” he said.

He reiterated that larger savers needed more attractive interest-earning instruments, given the tax differential between interest income and capital gains. The government’s tax relief for incomes of up to ₹12 lakh was a positive step for smaller depositors, he said.

Asked whether banks needed to be more proactive in setting deposit rates to attract savings, Kotak disagreed with the suggestion that deposit pricing alone was the answer. Technology had made it easier for money to move between financial products, he said, adding that artificial intelligence could further change how savings were managed.

Despite the risks, Kotak said he remained bullish on India’s long-term prospects, drawing on his experience of economic cycles, including the Asian financial crisis, the global financial crisis and the pandemic. “I am a deep believer that India will get it right,” he said.

He stressed, however, that optimism needed to be accompanied by a strategy to address the country’s macro challenges. “The time is for us to have a strategy, both as practitioners, to be awake to the reality of what is happening, and from a policy point of view, a strategic, structural answer to some of the challenges to our macroeconomy,” he said.