Why in News?

• To strengthen foreign currency inflows and improve external sector liquidity, the RBI has introduced a special dispensation allowing banks to mobilise fresh FCNR(B) deposits with maturities of 3–5 years until September 2026.
• Additionally, banks can swap these deposits with the RBI at concessional terms, effectively eliminating the cost of hedging foreign exchange risk.
• Experts estimate that the move could potentially attract $50–70 billion in foreign capital, although its success will depend largely on the interest rates offered by banks.

What’s in Today’s Article?

• What are FCNR(B) Deposits?
• Reasons Behind Introducing New Facility
• Reasons for FCNR(B) Deposits Currently Being Less Attractive
• Working of RBI’s New Swap Facility
• Additional Regulatory Relaxations
• Trends in NRI Deposits During FY26
• Conclusion

What are FCNR(B) Deposits?

• Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits are fixed-term deposits maintained by:
  • Non-Resident Indians (NRIs)
  • Overseas Citizens of India (OCIs)
  • Persons of Indian Origin (PIOs)
• Key features:
  • Deposits are held in foreign currencies such as the US Dollar (USD), Pound Sterling (GBP), Euro (EUR), Japanese Yen (JPY), Australian Dollar (AUD), and Canadian Dollar (CAD).
  • Such deposits protect depositors from exchange-rate fluctuations.
  • Interest earned is exempt from income tax in India for eligible non-residents.
  • Interest rates are linked to international benchmark rates.

Reasons Behind Introducing New Facility:

• Sharp decline in FCNR(B) inflows:
  • FCNR(B) inflows fell by 86% in FY26, and fresh inflows dropped to $946 million from $7.1 billion in FY25.
  • Outstanding FCNR(B) deposits stood at $33.8 billion at the end of March FY26.
  • The decline reflects - expiry of earlier regulatory incentives, lower returns compared to overseas deposit options, and strong competition from US dollar deposits abroad.
• RBI’s objective:
  • To boost foreign currency inflows.
  • Strengthen forex reserves and external sector resilience.
  • Provide banks with a cheaper source of overseas funding.
  • Enhance liquidity without significantly increasing borrowing costs.

Reasons for FCNR(B) Deposits Currently Being Less Attractive:

• Lower interest rates offered by Indian banks:
  • For example, SBI offers 3.35% [3–4 years FCNR(B) rate], HDFC bank offers 3.65%, and ICICI bank offers 3.0%.
  • In contrast, SBI offers about 6.3% on comparable domestic fixed deposits. HDFC and ICICI offer around 6.5% on rupee deposits.
• Competition from overseas markets:
  • US dollar deposits abroad provide higher returns.
  • For example, Merrick bank offers ~4.2% annualised percentage yield (APY), Morgan Stanley offers ~4.3% APY, and SBI's US Certificate of Deposit (CD) offers ~3.85%.
  • Therefore, unless Indian banks raise FCNR(B) rates by around 100 basis points (1%), NRIs may have little incentive to transfer funds to India.

Working of RBI’s New Swap Facility:

• Concessional hedging support: The RBI has allowed banks to swap FCNR(B) deposits with the central bank at concessional terms.
• Mechanism:
  • Banks sell US dollars to the RBI and simultaneously agree to buy them back at maturity.
  • Swap transactions will occur at the same exchange rate in both legs.
  • The swap is undertaken at par, removing exchange-rate risk.
• Operational conditions:
  • Facility available for deposits mobilised up to September 30, 2026.
  • The swap window remains open until October 16, 2026.
  • Banks may access the facility once every week.
  • Minimum transaction size: $1 million.
  • Settlement is based on the FBIL Reference Rate.
• Significance: The arrangement transfers most of the hedging burden from banks to the RBI, reducing costs and enabling banks to offer more competitive FCNR(B) rates without hurting profitability.

Additional Regulatory Relaxations:

• To encourage mobilisation of foreign currency deposits, RBI has also exempted these deposits from:
  • Cash Reserve Ratio (CRR): Portion of deposits banks must maintain with RBI as cash reserves.
  • Statutory Liquidity Ratio (SLR): Portion of deposits maintained in liquid assets such as cash, gold, or government securities.
• These exemptions improve banks’ deployable resources and lower the cost of raising FCNR(B) funds.

Trends in NRI Deposits During FY26:

• Overall NRI deposit flows: Total NRI deposit inflows declined to $14.41 billion from $16.16 billion in FY25.
• NRI deposits comprise: FCNR(B) deposits, Non-Resident External (NRE) accounts, and Non-Resident Ordinary (NRO) accounts.
• Shift towards rupee deposits:
  • Despite the fall in FCNR(B) inflows, NRIs increasingly preferred rupee-denominated deposits.
  • NRE deposits: Outstanding balances increased by $7.94 billion. Total outstanding reached $98.56 billion.
  • NRO deposits: Increased by $5.53 billion. Outstanding balances reached $33.33 billion.
  • Consequently, total outstanding NRI deposits rose marginally from $164.68 billion to $165.65 billion.

Conclusion:

• The RBI’s FCNR(B) deposit scheme represents a targeted external-sector intervention aimed at attracting foreign currency resources and strengthening financial stability.
• The success of the initiative will ultimately depend on whether lenders can offer sufficiently attractive returns to compete with global dollar deposit markets and revive NRI participation.