In a strategic move to stabilize the rupee and fortify foreign exchange reserves, several Indian banks have sharply increased interest rates on their Foreign Currency Non-Resident (Bank), or FCNR(B), deposits. This comes days after the Reserve Bank of India (RBI) introduced a special swap facility designed to make these deposits more appealing to non-resident Indians (NRIs).
RBI's Incentive for Forex Inflows
The RBI's initiative allows banks to raise fresh FCNR(B) deposits for a period of 3-5 years. Crucially, the central bank is bearing the entire hedging cost for these deposits and offering a concessional swap rate. This effectively provides banks with a lower-cost funding option, encouraging them to attract more foreign currency from NRIs, Overseas Citizens of India, and Persons of Indian Origin.
FCNR(B) deposits are fixed-term deposits denominated in foreign currencies, typically US dollars, offered by Indian banks to non-residents. Previously, interest rates on these deposits hovered around 3.0-4.0%.
Banks Respond with Higher Rates
Lenders have swiftly capitalized on this special window. Major public sector banks like Punjab National Bank are now offering 6.0-6.10% per annum for 3-5-year FCNR(B) deposits, with preferential rates available for deposits of $1 million and above. The country’s largest lender, State Bank of India, is also offering up to 6%.
Private sector counterparts are equally competitive. HDFC Bank and Bank of Baroda are offering rates up to 6% on US dollar deposits. Some smaller private lenders are offering even higher returns, with Yes Bank providing 6.50-6.60% and AU Small Finance Bank leading with significantly higher interest rates of 7.10% (up from 5.15% previously).
Benefits for the Banking Sector
Analysts highlight several advantages for banks. FCNR(B) deposits are exempt from Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) requirements, unlike domestic deposits. Siddharth Rajpurohit of Systematix Institutional Equities noted, “Our calculations show a 60 basis points higher NIM on FCNR (B) deposits.” While the direct net interest margin (NIM) benefit for individual banks might seem modest, these deposits are expected to constitute 10-15% of incremental deposits, helping to ease pressure on the certificate of deposit market and lowering overall cost of funds. This makes the move “significantly positive for the overall banking sector,” according to Rajpurohit.
For several quarters, Indian banks have grappled with credit growth outpacing deposit growth. The anticipated influx from FCNR(B) deposits is expected to alleviate this challenge, providing a much-needed boost to bank liquidity.
Expected Macroeconomic Impact
The market anticipates substantial foreign exchange inflows, with estimates ranging from $40-60 billion through this FCNR(B) scheme. Emkay Global Financial Services analysts project around $50 billion in inflows, expecting larger banks to secure a significant portion, but benefiting the entire industry. They foresee credit growth sustaining at 14.7% for FY27, supported by 13% FCNR-aided deposit growth.
Beyond banking, these inflows are expected to reverse currency weakness and potentially erase the projected balance of payments deficit. Goldman Sachs economists Arjun Varma and Santanu Sengupta forecast around $60 billion in additional capital inflows, leading to a balance of payments surplus of approximately 0.6% in the current financial year. Motilal Oswal Financial Services' Nitin Aggarwal also expects $40-50 billion in additional forex flows by March 2027, predicting a surge in FCNR deposits, particularly in July and August, which are seasonally strong months for forex inflows.
Experts even suggest the rupee could appreciate to around 94 against the US dollar if these flows materialize, potentially strengthening further to 92 if geopolitical tensions in West Asia resolve.