Gold Prices Under Pressure as RBI’s FCNR(B) Deposit Scheme Attracts Dollar Inflows

Rise in dollar inflows may put additional pressure on Gold prices, as expectations of substantial dollar inflows through the RBI’s FCNR(B) deposit scheme have further dampened sentiment by raising prospects of a stronger rupee.

Gold Prices Under Pressure Amid Dollar Inflows

Domestic gold prices in the last month fell 6 per cent to ₹146,344 per 10g on July 3, from ₹1,55,581 on June 4, while the yellow metal is also down 14 per cent from its record high of ₹1,69,349 recorded in March, according to data from the India Bullion and Jewellers Association (IBJA).

The correction is primarily driven by softer global gold prices and easing geopolitical concerns, with expectations of FCNR(B)-linked dollar inflows emerging as an additional factor that could limit gains in domestic gold prices.

FCNR(B) Deposit Scheme: A Key Factor

The RBI recently announced a USD-INR forex swap facility for fresh FCNR(B) deposits with 3-5 year tenors until September-end, under which the central bank absorbs the entire forex hedging cost.

Following the move, banks have raised FCNR(B) deposit rates to about 6-7 per cent from 3-4 per cent earlier, making the scheme more attractive to non-resident Indians.

Market Impact of Dollar Inflows

• NRIs have booked nearly $7 billion in FCNR(B) deposits in June alone, with overall inflows projected to reach $50 billion by October and stabilise rupee depreciation.
• Major banks offering these deposits include SBI, HDFC Bank, YES Bank, and Axix Bank.
• The RBI’s FCNR(B) measures are likely to play out gradually as inflows gather pace, with a stronger rupee generally weighing on domestic gold prices.

Key Takeaways

• Expectations of sustained dollar inflows through the RBI’s FCNR(B) deposit scheme may limit gains in domestic gold prices.
• A stronger rupee could act as a cap on domestic gold prices, alongside broader trends in global bullion markets.
• The RBI’s FCNR(B) measures are likely to play out gradually as inflows gather pace.

FAQs

What is the RBI’s FCNR(B) deposit scheme?

The RBI’s FCNR(B) deposit scheme is a USD-INR forex swap facility for fresh FCNR(B) deposits with 3-5 year tenors until September-end, under which the central bank absorbs the entire forex hedging cost.

How much have NRIs booked in FCNR(B) deposits in June?

NRIs have booked nearly $7 billion in FCNR(B) deposits in June alone.

What are the implications of the RBI’s FCNR(B) measures on domestic gold prices?

A stronger rupee generally weighs on domestic gold prices, and the RBI’s FCNR(B) measures are likely to play out gradually as inflows gather pace.

Conclusion

Going forward, market expectations of sustained FCNR(B) inflows and any resultant appreciation in the rupee could act as a cap on domestic gold prices, alongside broader trends in global bullion markets.

Investors and market participants should closely monitor the RBI’s FCNR(B) measures and their impact on domestic gold prices, as well as broader market trends.