FCNR has bought time; now let's transform how we finance our current account deficit: Neelkanth Mishra

Mishra said the FCNR scheme acts as a way to buy more time, effectively lengthening short-term currency hedges—which used to mature in three to six months—into three- to five-year commitments.  

The record $127 billion in dollar inflows from the foreign currency non-resident (bank) scheme have given India about a year or two to shield the economy from external volatility and push structural reforms to improve the way its current account deficit is financed, said Neelkanth Mishra, the country’s executive director at the World Bank Group.

The inflows come at a time when the West Asia crisis has driven up global oil prices, weighing on the external balance of a net energy importer like India.

Every $1 increase in global crude oil price costs India about $1.8 billion a year, Mishra said in an interview. The impact isn’t limited to oil, as higher prices could also raise the costs of gas and fertilizers. So, if oil prices remain elevated by $30-35 a barrel for a full year, India could see an impact of $55-60 billion in its external balance, he said.

“That’s quite substantial,” Mishra said. If $105 a barrel were to become the new global oil price, “perhaps a mix of imports and exports needs to change, and then the rupee needs to move on." Brent crude oil prices closed at $102.25 a barrel on Friday.

However, since it is unclear how long energy prices will stay high, it won’t be prudent to let the rupee depreciate sharply and then appreciate when energy prices correct, he said. “So, we bought ourselves time to protect ourselves from volatility (through the FCNR-B deposits),” Mishra said. The special FCNR-B) deposit facility was closed on 31 August, a month earlier than planned, as inflows far exceeded expectations.

Apart from India, Mishra also represents Bangladesh, Bhutan, and Sri Lanka, which form a four-nation constituency at the World Bank.

Hedging

Mishra also pointed to increased currency hedging, as exporters were delaying the repatriation of dollars and importers were hedging more than before due to fears of volatility. Some foreign asset managers with Indian holdings were also hedging their assets.

India's balance of payments deficit was around $18-20 billion in the second half of FY26, while RBI intervention was around $75 billion, Mishra said. The difference, he said, indicated more than $55 billion of speculative activity, mostly by corporations with natural demand and supply requirements for dollars.

“So, the more people hedged, the more was the demand for dollars and the more the rupee was weakening, and the more people were getting scared,” he said.

Mishra described the FCNR scheme as a form of “duration extension”, noting that forward short positions in currency hedging that previously expired in three or six months have effectively been extended to three or five years. “We have to use this opportunity, or use this period of stability that we bought ourselves with the FCNR, to get into more structural shifts in how we finance our current account usage,” he said.

Capital flows may not rise to levels seen over the past two decades for some time, Mishra said. India, therefore, needs to either adjust its current account deficit accordingly or find additional sources of capital.

AI investments and capital flows

Mishra cautioned against attributing weaker capital flows into emerging markets solely to the surge in investment in AI in the West.

“It is too early to judge on that,” he said, adding that even if AI investment were a bubble, “it is still forming.” He said demand for computing capacity could continue to rise, but rapid technological change and large-scale capacity additions could pose risks to investors.

Mishra also pointed to the cyclical nature of capital-intensive industries.

“These are heavily capital-intensive industries,” he said, adding that industries ranging from real estate and railways to AI go through cycles. “So, it will be a while before we get to know where it is headed,” he said.

Mishra said the larger issue for global capital flows is the debt level in major economies and the resulting high cost of capital. “The bigger risk...is the fiscal debt-to-GDP,” he said, pointing to economies where such ratios are above 100%.

With the US risk-free rate at around 5.3%, investors seeking a reasonable risk premium could require returns of 7-8% on equity, with emerging-market equities requiring an additional premium, he said. “In which case, the P/E multiples at which you will find them attractive are much lower than where we (India) are now,” he said. “So, that is the reason why I think things are moving. And I doubt that it is only AI,” Mishra said.

On MDR

On the decision to permit merchant discount rate (MDR) on certain UPI transactions, Mishra said the provision should not automatically be interpreted as meaning that charges will necessarily rise. “Look, as I see it, this is an enabling provision. It is not a mandate that you have to charge,” he said.

Whether payment providers actually charge would depend on competition, he said. “So, we should not assume that just because it is enabled, this will start happening,” Mishra said. He said it was in everyone's interest for UPI volumes to grow, given its widespread use even for small-value transactions.

“The way I see it is that, look, it is a marketplace. It is a competitive marketplace,” he said. “Some people will charge, some people will not. And then we will see whether people switch. So, let the market forces play out,” Mishra said.

Reforming MDBs

Mishra said multilateral development banks' role needs to evolve as emerging economies grow and their financial systems deepen. “In middle-income countries like ours, the role of MDB is necessarily, I think, has to be to address market failures,” Mishra said. He identified areas including critical minerals and agricultural exports as areas where institutions such as the World Bank and IFC could play a bigger role.

In contrast, in low-income countries, the need for concessional loans and grants is greater. Rising food and energy costs have contributed to a deterioration in poverty trends in some countries, while demand for capital has increased, he said. At the same time, grant funding and overseas development assistance have been weakening.

“The role of multilateral banks, therefore, in middle-income countries, whether low-income or middle-income countries, has to be a lot more creative—for deeper pipelines, longer pipelines, addressing market failures, much more focused,” Mishra said.

About the Author

Harsh Kumar

Harsh Kumar is a policy reporter at Mint (HT Media Group), where he covers the Ministry of Commerce and Industry along with key departments of the Ministry of Finance, including the Department of Economic Affairs (DEA) and the Department of Financial Services (DFS). With over five years of experience in business and economic journalism, he has developed strong expertise in tracking policy developments and their wider economic impact.<br><br>He has previously worked with Business Standard, Moneycontrol, and Outlook Money, where he reported extensively on banking, financial services, and the broader economy. Over the years, he has built a reputation for delivering accurate, insightful, and impactful stories, supported by a keen eye for detail and a consistent track record of breaking exclusive news.<br><br>An alumnus of Jamia Millia Islamia, Harsh closely follows regulatory changes and key economic trends shaping India’s financial and industrial landscape. His reporting aims to simplify complex policy issues for a wider audience while maintaining depth and credibility.<br><br>Outside of work, he enjoys tracking policy developments, finding scoops, and travelling, reflecting his curiosity about how economic decisions shape everyday life.