Why in News?
The Reserve Bank of India (RBI) has allowed banks to mobilise fresh FCNR(B) deposits till September 2026 and offered a swap facility to reduce hedging costs. Despite this, in recent times inflows remain weak, raising the need for higher interest rates to attract NRI funds.
About FCNR(B) Deposits:
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- Foreign Currency Non-Resident (Bank) or FCNR(B) deposits are fixed-term deposits opened by NRIs, OCIs, and PIOs in India. These accounts allow deposits in foreign currencies like the US dollar, euro, pound sterling, yen, Australian dollar, and Canadian dollar, without converting them into rupees.
- Interest earned on these deposits is tax-free in India for eligible non-residents. Banks offer rates linked to global benchmark interest rates.
- Foreign Currency Non-Resident (Bank) or FCNR(B) deposits are fixed-term deposits opened by NRIs, OCIs, and PIOs in India. These accounts allow deposits in foreign currencies like the US dollar, euro, pound sterling, yen, Australian dollar, and Canadian dollar, without converting them into rupees.
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Current Situation and Trends:
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- FCNR(B) inflows have fallen sharply. In FY26, inflows dropped 86% to $946 million from $7.1 billion in FY25. Outstanding FCNR(B) deposits stood at $33.8 billion.
- Overall NRI deposits also declined in FY26 to $14.41 billion from $16.16 billion, although NRE and NRO deposits saw an increase, partly offsetting the fall in FCNR(B) inflows. Both NRE and NRO accounts are denominated in Indian Rupees.
- FCNR(B) inflows have fallen sharply. In FY26, inflows dropped 86% to $946 million from $7.1 billion in FY25. Outstanding FCNR(B) deposits stood at $33.8 billion.
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Interest Rate Gap and Competitiveness:
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- FCNR(B) deposit rates in India remain relatively low compared to domestic rupee deposits and global alternatives. Major Indian banks like SBI, HDFC Bank, and ICICI Bank offer around 2.9%–3.6% on FCNR(B) deposits, while comparable rupee fixed deposits offer around 6.3%–6.5%.
- In contrast, US dollar deposits and certificates of deposit in foreign markets offer over 4% returns. For example, US banks such as Merrick Bank and Morgan Stanley offer 4–4.3% annual yields, making them more attractive to NRIs.
- Experts suggest Indian banks may need to raise FCNR(B) rates by at least 100 basis points to remain competitive.
- FCNR(B) deposit rates in India remain relatively low compared to domestic rupee deposits and global alternatives. Major Indian banks like SBI, HDFC Bank, and ICICI Bank offer around 2.9%–3.6% on FCNR(B) deposits, while comparable rupee fixed deposits offer around 6.3%–6.5%.
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RBI Measures and Swap Facility:
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- To boost inflows, the RBI has introduced a swap facility that covers hedging costs for banks raising FCNR(B) deposits. This reduces risk and improves profitability for banks.
- Banks can exchange foreign currency deposits with the RBI at a concessional rate, making it easier to mobilise dollar funds. The facility is valid for deposits raised till September 2026.
- To boost inflows, the RBI has introduced a swap facility that covers hedging costs for banks raising FCNR(B) deposits. This reduces risk and improves profitability for banks.
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Challenges in Mobilisation:
Despite policy support, inflows remain weak due to low interest competitiveness and attractive returns available in foreign markets, especially in the US where rates remain above 4%. Experts believe regulatory support alone may not be sufficient without higher deposit rates.
Importance for India:
FCNR(B) deposits are an important source of foreign currency funding for India’s external stability. Higher inflows help strengthen forex reserves, support the banking system, and reduce pressure on external financing.
Conclusion:
While RBI’s swap facility improves the attractiveness of FCNR(B) deposits, weak inflows highlight the need for higher interest rates. To effectively attract NRI funds, Indian banks must balance global competition, hedging costs, and domestic financial stability.
