Are FCNR-B deposits really an expensive source of funding?

India’s foreign currency non-resident (FCNR-B) deposits have emerged as an unexpectedly powerful source of external funding. The Reserve Bank of India’s latest FCNR-B swap window mobilised a staggering $136.4 billion in just about 90 days, far surpassing expectations. The surge has strengthened India’s balance of payments and added to its foreign exchange reserves. In a report on FCNR-B deposit flows, Bank of America Securities (BofA Securities) expects India’s balance of payments to swing to a $90 billion surplus in FY27, potentially pushing forex reserves beyond $775 billion.

But what does this mean for the economy, banks and the rupee? Here are three myths, three positives and three risks.

Myth 1: FCNR-B deposits are an expensive source of funding.

Not necessarily. BofA estimates that banks typically raise three-to-five-year deposits at around 6.5-7.5%, while larger banks have offered FCNR-B rates of roughly 5.25-6%. More importantly, the RBI takes on the foreign-exchange risk, while FCNR-B deposits also do not attract CRR and SLR requirements. That makes the deposits relatively cheaper and gives banks greater scope to deploy the funds.

Myth 2: The swaps will be a big loss for the RBI.

The RBI will incur a cost for hedging, but BofA argues that this should not automatically be viewed as a loss. The central bank can earn returns on the foreign currency reserves it receives. BofA estimates hedging costs at about 2.8-3%, against potential returns of roughly 4-4.25% on US debt, meaning the carry could offset much of the hedging cost.

Myth 3: All the deposits will inevitably leave when they mature.

That is also not certain. BofA points to the experience of 2016, when some of the funds remained within India’s banking system through other non-resident deposit channels. The extent of eventual reversal will depend on economic conditions, interest-rate differentials, and how banks structure their foreign-currency funding.

The positives

The biggest immediate benefit is better visibility on credit growth. Indian banks have faced deposit constraints in recent years and increasingly relied on wholesale funding. The FCNR-B inflows could provide a significant liquidity boost. BofA estimates that the resulting increase in base money could eventually support Rs 25-40 trillion of additional credit creation, equivalent to around 7-11% of GDP over two to three years.

Banks could also benefit from lower funding costs. With FCNR-B deposits providing cheaper funding and CD rates already easing, bank profitability could get a boost as the cost of raising money declines.

For the RBI, the surge gives greater flexibility in managing liquidity. With more durable liquidity in the system, the central bank has more room to align its liquidity stance with its broader monetary-policy objectives.

But there are risks

More credit is not automatically good news. A stronger credit impulse could add to demand-side inflation. BofA estimates that the potential growth boost of 50-80 basis points could eventually raise inflation by 30-50 basis points.

The second concern is credit quality. If banks deploy excess liquidity too quickly, particularly towards consumption, underwriting standards could weaken. Since FCNR-B funding could reverse relatively quickly, banks also need to be careful about funding long-term loans with potentially shorter-duration money.

The third risk is the current account. Easier credit can fuel consumption and investment, boosting imports. If imports rise faster than exports, the current account deficit could widen even as the balance of payments gets an initial boost.
The bigger opportunity

The FCNR-B window may ultimately give India something more valuable than dollars: time. The RBI has demonstrated that it can mobilise a large pool of foreign exchange quickly and provide greater stability to the external account. But these deposits are not a permanent substitute for durable capital inflows.

The bigger policy challenge is therefore to use this breathing space to attract more long-term foreign investment. BofA estimates India needs around $100 billion of new investment capital every year on a net basis to strengthen external stability. In that sense, FCNR-B can be a bridge—not the final solution—to a stronger and more sustainable capital account.