In Case You Missed It: ‘External debt could rise to $900 bn’: RBI’s FCNR(B) move has created five major risks, warns ISB professor
In a series of tweets, the professor has raised concerns over the risks created by FCNR(B) deposits, external commercial borrowings, and other foreign-currency borrowings used to support the rupee.
Tantri said the current approach of guaranteeing debt does not work well for new and innovative firms. Their investments are inherently risky and may not be able to support fixed repayments.
“There is certainly a possibility that taxpayers will lose money on some equity guarantees. But the total loss should be far smaller than the bill imposed by the NRI subsidy scheme,” he said.
The finance professor acknowledged that taxpayers could lose money on some equity guarantees. But he argued that the total loss could be much smaller than the cost of the NRI subsidy scheme.
“Unlike the NRI subsidy scheme, however, this risk carries substantial upside for the country. It can stimulate innovation, investment, and job creation while helping India address its persistent “missing middle” problem,” he added.
When an X user asked whether the government should have a seat on the board of an innovative company, Tantri opposed the idea. “Bad idea sir in my view. Give a guarantee and have a team of respected corporate leaders manage the funds under the guarantee. SIDBI type plan also does not work where government tries to invest. Just follow this NRI model. Instead of offering subsidies to NRIs, offer it to start ups.”
The Professor’s FCNR(B) Concerns
Tantri has been critical of the RBI’s FCNR(B) measures, under which India attracted a large inflow of dollars.
On September 3, he said that, together with ECBs and other foreign-currency borrowing, India had mobilised roughly $136 billion in borrowed dollars to defend what he called arbitrary exchange-rate levels.
He warned that India’s external debt could rise from about $765 billion to nearly $900 billion. He also said the attempt to prevent a quick appreciation of the rupee had left the banking system with surplus liquidity, or reserve money.
The professor said financial decisions must be evaluated ex ante, or before their outcomes are known. “Not every risky decision ends in disaster, but escaping disaster does not justify taking an unnecessary risk,” he said. He argued that the FCNR(B) and ECB measures should be assessed through that lens.
He identified five major risks from the measures, including the possibility of clustered outflows.
Much of the $136 billion, he said, is borrowed money that must leave within a known period. While the direct cost of the RBI’s exchange-rate guarantee may remain manageable even if the rupee depreciates another 10%, he said the bigger risk was that markets could anticipate the large, concentrated dollar repayments and begin exiting before maturity.
“A bad geopolitical situation three years from now could turn the scheduled outflow into serious pressure on the rupee,” he said. “We have taken a large financial bet on future conditions over which we have no control.”
