Banks hike FCNR(B) deposit rates to maximize RBI forex window

Days after the Reserve Bank of India (RBI) announced a special window for banks to raise FCNR (B) (foreign currency non-resident bank) deposits in a bid to bolster its foreign exchange reserves and stabilise the rupee, several lenders have raised interest rates on such deposits to make them even more attractive. 

FCNR (B) deposits are special fixed term deposits that banks in India can offer to NRIs, overseas citizens of India and person of Indian origin. The RBI announced a swap facility for fresh FCNR (B) deposits mobilised for a 3-5-year period. Banks that raise such foreign currency funding are then allowed to swap them into rupees at a concessional rate. To make the scheme more attractive, the central bank will bear the entire hedging cost. 

Lenders have quickly taken the advantage of this special window and have raised their interest rates on eligible FCNR (B) deposits to attract funds from non-resident Indians.

State-owned Punjab National Bank is now offering interest rates of 6.0-6.10% per annum for 3-5-year deposits. Additionally, it will offer preferential rates on a negotiated basis for deposits of $1 million and above.

The country’s largest lender State Bank of India is also now offering interest rate of up to 6% on FCNR (B) deposits. Rival Bank of Baroda as well as HDFC Bank, the country’s largest private sector lender, is also offering rates of up 6% on US dollar deposits. Earlier the interest rates on such deposits used to be around 3.0-4.0%. 

Some private sector lenders are offering higher interest rates than their public sector counterparts. Yes Bank, for instance, is offering interest rates in the 6.50-6.60% for such deposits. AU Small Finance Bank, on the other hand, is offering significantly higher interest rates of 7.10%, compared with 5.15% earlier for FCNR (B) deposits.

The effective zero hedging costs, plus the concessional swaps offered at a fixed 1.5% per annum for public sector undertakings raising external commercial borrowings (ECBs) and overseas borrowings of banks will help attract US dollar inflows and will provide banks and PSUs with lower cost funding options. 

Notably, analysts point that even after raising interest rates on FCNR (B) deposits sharply, the rates offered by most lenders are lower than their highest rates offered on domestic retail term deposits. These special FCNR (B) deposits are also exempt from SLR (statutory liquidity ratio) and CRR (cash reserve ratio) requirements. So, these should have some benefit on net interest margins (NIM) of banks and also help reduce their cost of funds.

“Unlike domestic deposits (subject to 18% SLR and 3% CRR), these FCNR (B) deposits are fully exempt from such requirements. Our calculations show a 60 basis points higher NIM on FCNR (B) deposits. While the direct NIM benefit for coverage banks is modest (2-4 bps) due to limited share, these deposits are expected to comprise 10-15% of incremental deposits, easing pressure on the certificate of deposit market and lowering overall cost of funds. Hence, this move is significantly positive for the overall banking sector,” pointed Siddharth Rajpurohit of Systematix Institutional Equities.

Over the past few quarters, one challenge banks have faced is that credit growth has been much faster than deposit growth. The incremental flows expected through this special window for FCNR (B) deposits should thus help.

Analysts at Emkay Global Financial Services expect $50 billion in inflows through the FCNR (B) scheme. While the larger banks are expected to corner a large chunk of the deposit flows, the entire industry does stand to benefit, they said.

“This is a tailwind for the credit cycle, as it removes the banking system’s worries about being able to fund deposit growth. We expect credit growth to sustain at 14.7% for FY27, funded by 13% FCNR-aided deposit growth,” the Emkay analysts said in their June 14 report.

Importantly, analysts also feel that funds mobilised by this route should reverse the currency weakness, and the expected balance of payments deficit could also get wiped out additionally aided by inflows via ECBs and foreign portfolio investors’ purchase of government securities. The Centre had on June 5, 2026, announced FIIs would be exempt from capital gains tax on income earned from investments in G-Secs.

The Emkay analysts, in fact, feel the balance of payment could possibly be in a surplus for the rest of the year, and the rupee could appreciate to around 94 to the US dollar should the flows materialise. It could further even rise to around 92 if the conflict in the West Asia be resolved, they added.

Goldman Sachs economists Arjun Varma and Santanu Sengupta expect the RBI measures could help in driving $60 billion of additional capital inflows and thus expect the balance of payments to be in a surplus of around 0.6 per cent in the current financial year.

According to Nitin Aggarwal of Motilal Oswal Financial Services there could be $40-50 billion in additional forex flows in the year ending March 2027 and aid in business growth for the banking system.

He pointed that FCNR deposits form only 1.2 per cent of the overall deposits in the system as of March 2026. During FY26, the system garnered $900 million in FCNR deposits, compared with 7 billion in FY25. Aggarwal sees “a surge in FCNR deposits” in the coming months, especially in July 2026 and August 2027, which marks the festive month of Onam, and these are seasonally stronger months for forex inflows.