Central bank measures aimed at boosting foreign currency inflows prompt lenders to sharply increase returns on FCNR(B) deposits
India’s leading banks have significantly increased interest rates on foreign currency deposits for non-resident Indians (NRIs) after the Reserve Bank of India (RBI) introduced measures to reduce costs for lenders and attract overseas funds.
The RBI announced last week that it would absorb the full hedging cost on fresh Foreign Currency Non-Resident Bank (FCNR(B)) deposits with maturities of three to five years until September 30, 2026. The move is designed to encourage foreign currency inflows, strengthen foreign exchange reserves and ease pressure on the rupee.
Following the announcement, several banks revised their FCNR(B) deposit rates. HDFC Bank, India’s largest private lender, increased rates by 235 to 265 basis points, offering up to 6% on deposits with three- to five-year tenures. State Bank of India raised rates by as much as 300 basis points, with returns ranging from 5.25% to 6% depending on deposit size and tenure.
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Among the banks, AU Small Finance Bank announced some of the highest rates in the market, offering 7.1% on three-year deposits and 7% on five-year deposits
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Other lenders have also moved quickly to enhance returns as competition for NRI funds intensifies
The RBI’s decision changes the economics of FCNR(B) deposits. Hedging costs, estimated at around 3% annually, have historically limited the interest rates banks could offer. With those costs now covered by the central bank, lenders have greater flexibility to pass the savings on to depositors.
Analysts estimate the scheme could attract between $40 billion and $70 billion in foreign currency inflows, helping stabilise the rupee, which has weakened by around 6% this year and reached record lows in May.
Market observers have drawn comparisons with a similar RBI programme launched in 2013 that mobilised approximately $34 billion. However, they note that narrower interest rate differentials between India and major economies could moderate inflows this time, despite the more favourable hedging support.
