In a recent move, the Reserve Bank of India (RBI) has introduced a special dispensation, allowing banks to attract foreign currency deposits from non-resident Indians (NRIs) with a twist. The RBI's strategy aims to make these FCNR(B) deposits more appealing by covering the hedging costs, thus offering a competitive edge to Indian lenders.
The FCNR(B) Advantage
FCNR(B) deposits are fixed-term accounts that NRIs, Overseas Citizens of India (OCIs), and Persons of Indian Origin (PIOs) can open in India. These accounts are denominated in foreign currencies, providing a unique opportunity for overseas Indians to maintain their savings in dollars, pounds, euros, or other major currencies.
One of the key advantages of FCNR(B) deposits is the tax exemption on interest earned. As long as the depositor meets the criteria of a non-resident under Indian tax laws, they can enjoy tax-free interest, which is a significant incentive.
Interest Rates and Competition
However, the interest rates offered on FCNR(B) deposits have historically been lower than conventional rupee fixed deposits. For instance, State Bank of India (SBI) currently offers 3.35% on FCNR(B) deposits with a 3-4 year tenure, compared to 6.3% for a regular 3-year fixed deposit. This disparity is due to the lower benchmark rates in the US, UK, and Europe, where these foreign currencies originate.
RBI's Intervention
The RBI's recent intervention aims to address this issue. By allowing banks to swap FCNR(B) deposits with the RBI at a concessional rate, the central bank effectively absorbs the hedging costs. This move is expected to improve the economics of these deposits, enabling banks to offer more competitive rates without significantly impacting their margins.
Attracting NRI Funds
Bankers, however, caution that the regulatory incentive alone might not be enough to trigger a significant influx of NRI funds. With US dollar deposit rates still offering returns of over 4% in major markets, Indian banks may need to raise FCNR(B) deposit rates by at least 100 basis points to remain attractive.
A Shift in NRI Preferences
The data for the financial year 2025-26 (FY26) reveals an interesting trend. FCNR(B) deposit inflows plunged by 86%, indicating a shift in NRI preferences. Outstanding balances in NRE accounts, which are rupee-denominated accounts for NRIs, increased significantly, suggesting a greater attraction to domestic interest rates.
The Way Forward
For Indian banks to compete effectively, they must offer rates that match or exceed those offered by foreign banks. The RBI's support is a step in the right direction, but banks will need to carefully consider their pricing strategies to attract NRI funds.
In my opinion, this move by the RBI is a strategic attempt to balance the books and attract much-needed foreign capital into Indian markets. It will be interesting to see how banks respond and whether this initiative succeeds in reversing the decline in FCNR(B) deposit inflows.
