RBI, UAE central bank discuss hurdles to deposit drive: report

The central banks of India and the United Arab Emirates have held talks over regulatory concerns hindering India’s effort to attract foreign-currency deposits from Indians living in the Gulf, Bloomberg reported.

Officials from the Reserve Bank of India (RBI) and the Central Bank of the UAE met in Dubai last week, the report said, citing unidentified people familiar with the private discussions.

The UAE regulator raised concerns that banks operating in Dubai’s financial free zone could prioritize India’s fundraising campaign over serving local customers, the report said.

India is seeking overseas deposits to bolster its foreign-exchange reserves and support the rupee, which weakened past 96 to the dollar this week as rising oil prices placed further pressure on the crude-importing economy.

The RBI introduced a program in June offering banks a zero-cost foreign-exchange swap on deposits raised from non-resident Indians. By absorbing the hedging cost, the central bank allows lenders to offer more attractive returns on three-year to five-year foreign-currency deposits.

RBI later allowed Indian lenders to extend loans against the deposits, including through their overseas branches. The change permits leveraged structures that can increase returns for depositors.

Indian banks have attracted about $10 billion through the program, Reuters reported, citing two people familiar with the matter. Both declined to be identified because they were not authorized to speak to the media.

Bankers and economists estimate that the program could eventually attract between $30 billion and $60 billion, although inflows so far remain well below those projections.

The Gulf was initially expected to be one of the program’s largest sources of capital because of its large Indian population and strong remittance links with India.

But one unnamed banker told Reuters that funding constraints at Middle Eastern banks meant the program could instead be led by Indians living in Singapore and Hong Kong. The banker was not authorized to speak publicly and was not identified.

Indian finance ministry officials and state-owned banks also discussed the program this week. Lenders reported particularly strong interest from Indians in Singapore and Hong Kong, Reuters said, citing three bankers familiar with the discussions.

Officials and bankers expect less interest from Indians living in the US and UK because both countries tax interest earned on the deposits. The income is exempt from tax in India, but overseas taxation reduces the returns available to depositors in Western markets.

The Gulf may still offer a larger pool of potential depositors, but Indian banks face regulatory and funding obstacles in the region.

UAE rules may limit how aggressively Indian banks can market the deposits. A recent central-bank circular restricted some activities by representative offices, including documentation support and cross-selling.

Banks have also struggled to secure overseas funding. Middle Eastern and Japanese lenders face country-specific risk limits, while dollar borrowing costs have risen since the RBI permitted leveraged deposit structures.

The discussions highlight the tension between India’s effort to attract overseas capital and the UAE regulator’s responsibility to ensure banks continue serving local customers.

India has previously turned to its diaspora during periods of pressure on the rupee. A concessional swap program introduced in 2013 attracted about $26 billion in foreign-currency deposits.

Neither the RBI nor the Central Bank of the UAE has publicly disclosed the outcome of the Dubai talks.