Summary of this article
Banks raise FCNR deposit rates after RBI measures.
RBI to bear hedging costs on eligible deposits.
Lenders may attract $35-40 billion in inflows.
Several banks have increased interest rates on foreign currency deposits for non-resident Indians (NRIs) after the Reserve Bank of India (RBI) announced measures to attract overseas dollar inflows and support the rupee.
The central bank, on June 5, had stated that it would bear the full hedging cost on fresh Foreign Currency Non-Resident (Bank), or FCNR(B), deposits of three- to five-year maturity mobilised by banks until September 30, 2026. The move is part of a broader set of measures aimed at boosting foreign currency inflows amid pressure on the domestic currency.
Banks Revise FCNR Deposit Rates
Following the RBI's announcement, several lenders have revised their FCNR(B) deposit rates upward.
HDFC Bank, the country's largest private sector lender, has increased rates by 235-265 basis points (bps), and is now offering up to 6 per cent on deposits with maturities of three to five years.
State Bank of India (SBI) raised rates by around 300 bps across similar tenures. For deposits of up to USD 1 million, SBI now offers 5.25-5.75 per cent on three- to five-year deposits. For deposits above USD 1 million, the rates range between 5.5 per cent and 6 per cent.
AU Small Finance Bank has increased rates by 195 bps, and is offering 7.1 per cent on three-year deposits, and 7 per cent on five-year deposits.
According to Reuters, Yes Bank has fixed rates at 7 per cent on three-year deposits, 7.05 per cent on four-year deposits, and 7.10 per cent on five-year deposits. Other lenders are also expected to revise their FCNR(B) deposit rates.
RBI Offers Hedging Cost Support
Under the special facility, RBI will absorb the hedging cost through a concessional swap arrangement for eligible FCNR(B) deposits mobilised during the scheme period.
FCNR(B) deposits allow NRIs to maintain fixed deposits (FDs) in designated foreign currencies such as the US Dollar, Pound Sterling, Euro, Japanese Yen, Canadian Dollar, and Australian Dollar. Since these deposits are held in foreign currency, depositors are protected from exchange-rate fluctuations during the tenure of the deposit.
Potential For Higher Foreign Currency Inflows
The banking sector is expected to use the revised rates to attract additional foreign currency deposits from overseas Indians.
According to a Reuters report, banks could mobilise between USD 35 billion and USD 40 billion through FCNR(B) deposits under the scheme. RBI has also indicated that it is open to banks providing guarantees to offshore lenders, allowing NRIs to borrow funds abroad and place them as deposits with Indian banks.
The latest measures come at a time when the rupee has remained under pressure against the US dollar. The currency has weakened by around 6 per cent so far this year and touched record low levels in May.
India's foreign exchange reserves stood at around $688 billion in the week ended May 30, according to the latest RBI data. While reserves remain among the highest on record, policymakers have been taking steps to ensure adequate foreign currency liquidity and stable capital inflows.
Similar Scheme Was Introduced In 2013
The central bank had introduced a similar FCNR(B) swap window in 2013 during the period known as the "taper tantrum", when the rupee came under pressure following signals of monetary policy tightening by the US Federal Reserve.
That scheme helped banks mobilise more than USD 30 billion in foreign currency deposits. HDFC Bank had raised about USD 3.4 billion under the programme, followed by SBI, ICICI Bank and several foreign banks operating in the country.
