FCNR(B) rates rise as banks compete for NRI dollars; more lenders may join before RBI window closes in September

Banks are raising interest rates on Foreign Currency Non-Resident (Bank) or FCNR(B) deposits as they step up efforts to attract overseas dollar inflows ahead of the Reserve Bank of India's special deposit window closing on September 30, 2026. The move comes amid rising global interest rates, higher overseas borrowing costs and intensifying competition for foreign currency deposits.

ICICI Bank and HDFC Bank, two of the country's largest private lenders, have already revised select FCNR(B) deposit rates. Industry executives expect more banks to follow suit in the coming weeks as they seek to maximise inflows from non-resident Indians (NRIs).

ICICI Bank has increased the interest rate on FCNR(B) deposits of $5 million and above to 6.25% from 6%. HDFC Bank has raised rates by 25 basis points on its three- to five-year US dollar FCNR(B) deposits, taking the rate to 6.25%.

Bankers said the revisions reflect changes in global funding costs as well as the need to remain competitive.

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"Overseas borrowing has become more expensive and banks have to adjust deposit rates accordingly. Competition has also intensified as lenders try to mobilise as many foreign currency deposits as possible before the special window closes," a senior private sector bank executive told the Economic Times.

The RBI operationalised the special FCNR(B) deposit scheme on June 8, allowing banks to mobilise foreign currency deposits under relaxed norms. Since then, global benchmark yields have moved higher.

For instance, HDFC Bank raised $750 million through a five-year overseas bond issue on June 16, priced at 90 basis points above the five-year US Treasury yield, the narrowest spread achieved by an Indian private sector bank. Since then, the five-year US Treasury yield has risen to around 4.45% from 4.15%, while the 10-year Treasury yield has climbed to 4.74% from 4.48%. Bankers say credit spreads for Indian issuers have also widened, pushing up the overall cost of dollar funding.

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What is an FCNR(B) deposit?

An FCNR(B) deposit is a fixed-term foreign currency account that allows NRIs to park overseas earnings in major global currencies without converting them into Indian rupees, protecting depositors from exchange rate risk.

These deposits can be opened in currencies including the US dollar, British pound, euro, Australian dollar, Canadian dollar and Japanese yen, with tenures ranging from one to five years. Both the principal and interest are fully repatriable, while the interest earned is exempt from income tax in India.

Under the RBI's special facility, banks have been offering promotional rates of around 6% to 6.5% on US dollar deposits, subject to a mandatory one-year lock-in.

$49 billion in inflows

India has attracted nearly $49 billion in foreign inflows during June and July through FCNR(B) deposits, overseas borrowings and investments in government bonds. However, the rupee has appreciated only about 0.4% against the US dollar since early June, far below the more than 10% rally seen during the 2013 FCNR(B) mobilisation.

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Analysts say the difference reflects today's global environment, marked by elevated oil prices, geopolitical tensions in West Asia and a stronger US dollar. They also note that FCNR(B) deposits do not directly increase dollar liquidity in the forex market because banks swap these deposits with the RBI for rupees under the central bank's special facility.

The RBI's dollar sales to smooth currency volatility and banks' hedging of future foreign currency liabilities have further limited the impact on the rupee.

Even so, bankers remain optimistic that FCNR(B) mobilisation will continue to gather pace, with total inflows potentially reaching $75 billion by September 30, supported by attractive returns and tax-efficient features for NRIs.

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