Why Are Banks Increasing FCNR Deposit Rates?
Indian banks have started raising interest rates on Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits after the Reserve Bank of India (RBI) introduced a special forex swap facility aimed at attracting foreign currency inflows.
The move follows the RBI’s decision to absorb the full hedging cost for fresh FCNR(B) deposits with maturities ranging from three to five years until September 30. The measure is designed to encourage non-resident Indians (NRIs) to park more foreign currency deposits with Indian banks while helping strengthen the country’s external position.
As a result, several lenders have significantly increased deposit rates, making FCNR(B) accounts more attractive for overseas Indians.
HDFC Bank Raises Rates To 6%
HDFC Bank, India’s largest private sector lender, has emerged as one of the first major banks to revise its FCNR(B) offerings.
The bank has increased rates by as much as 260 basis points and is now offering up to 6 per cent interest on FCNR(B) deposits with maturities between three and five years.
Other lenders have moved even more aggressively. Private sector banks including Yes Bank and AU Small Finance Bank are offering rates as high as 7.10 per cent in the same maturity segment.
Industry participants expect more banks to revise their offerings as competition for NRI deposits intensifies.
How Does RBI’s New FCNR Scheme Work?
Under the special arrangement announced by the RBI, authorised dealer banks that mobilise fresh FCNR(B) deposits with maturities of three to five years can access a dedicated US dollar-rupee forex swap facility.
Traditionally, banks incur hedging costs when converting foreign currency deposits into rupee assets. Under the new framework, the central bank will absorb the entire hedging cost, reducing funding expenses for banks.
This allows lenders to pass on the benefit to depositors through significantly higher interest rates while maintaining profitability.
The facility is available for deposits raised in any freely convertible currency, although the swap transaction with the RBI will be conducted only in US dollars.
How Much Foreign Capital Could Flow Into India?
Market estimates suggest the scheme could attract substantial foreign currency inflows over the coming months.
Research estimates vary considerably across institutions. Barclays expects FCNR(B) inflows of approximately $25 billion to $30 billion, while MUFG Bank projects around $20 billion under its base-case scenario.
SBI Research has offered the most optimistic forecast, estimating potential inflows of $40 billion to $45 billion through the FCNR(B) route.
If achieved, the inflows would provide a significant boost to India’s foreign exchange reserves and help stabilize the rupee amid global economic uncertainties.
Why Is The Scheme Important For The Rupee?
The RBI’s initiative comes as policymakers seek to strengthen external capital inflows and improve liquidity in foreign exchange markets.
By incentivising NRI deposits, the central bank aims to attract long-term foreign currency resources without increasing external debt risks.
The strategy is similar to a successful FCNR(B) mobilisation programme introduced in 2013, which helped India navigate a period of currency volatility and generated approximately $34 billion in inflows.
The latest scheme is expected to support the rupee while helping banks access stable foreign currency funding at competitive costs.
What Are The Key Conditions?
The RBI has clarified that banks remain free to determine deposit pricing according to their internal policies, subject to existing regulatory ceilings.
The underlying FCNR(B) deposits must have a minimum tenure of three years and a maximum tenure of five years to qualify for the swap facility.
Additionally, the deposits will be subject to a one-year lock-in period.
For deposits raised in currencies other than the US dollar, banks will be required to convert the value into equivalent US dollar amounts using prevailing market exchange rates before accessing the swap facility.
The central bank has also instructed lenders to maintain consistent conversion policies and detailed documentation for audit and compliance purposes.
What Does This Mean For NRIs?
The higher interest rates create a compelling opportunity for NRIs looking to earn attractive returns on foreign currency savings while maintaining exposure to global currencies.
With some banks now offering returns of up to 7.10 per cent, FCNR(B) deposits have become significantly more attractive compared to many international fixed-income options.
As more banks revise rates and the RBI’s support mechanism remains in place, FCNR(B) deposits could witness a strong resurgence, helping both depositors and the broader Indian financial system.
