RBI's scheme to soak up diaspora dollars is running smoothly as expected. Banks have mobilised $17.40 bn from NRIs during a special drive to raise fresh FCNR(B) - foreign currency non-resident (bank) - deposits. The apex bank's scheme, which was operationalised on June 8 and will run till September 30, allows banks to raise 3- and 5-yr deposits without hedging the currency risk. Since the central bank is absorbing the currency risk, banks are offering higher tax-free returns on these deposits. Going by the response to the scheme, it could draw in $50 bn by September.

The central bank has used this measure on earlier occasions of dollar flight, such as during the US Federal Reserve's taper tantrum in 2013, and earlier in 2000 and 1998. The response had been robust each time, and earlier fundraising drives provide a rough estimate of collections for this year. The rupee has been under pressure since the US war on Iran and the crisis that has followed in West Asia, and special dollar deposits by NRIs should help strengthen forex reserves. Deposit growth at Indian banks has been lagging credit growth, and the special FCNR(B) scheme could also help address the imbalance. Private and foreign banks have been tight-lipped about their targets and collections, but public sector banks are more open about both. Banks must disclose daily data on FCNR(B) deposits to RBI.

Special rates for overseas investors are warranted when a country faces macroeconomic instability, but they distort market pricing and become a liability for banks. Likewise, absorbing hedging risks makes this an expensive intervention for the central bank's balance sheet. India has restricted the use of special NRI deposits to exceptional circumstances, knowing well that such schemes work, albeit at a cost. Yet, repeated recourse to the measure over the decades speaks to the fragility of India's balance of payments. India must build greater resilience into its export earnings to avoid emergency measures like special NRI deposits.