Indian banks have begun sharply raising interest rates on Foreign Currency Non-Resident [FCNR(B)] deposits following the Reserve Bank of India's special measures aimed at attracting foreign currency inflows. With some lenders now offering more than 7 percent on dollar deposits, the scheme has emerged as one of the most attractive options available to non-resident Indians seeking higher returns on overseas savings.
The RBI's latest package, announced to strengthen foreign exchange inflows, exempts incremental FCNR(B) deposits from cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements. The central bank has also allowed banks to issue standby letters of credit, enabling NRIs to use leverage and potentially enhance returns.
Several banks have revised FCNR(B) deposit rates with effect from June 10.
State Bank of India has introduced a special scheme, SBI Advantage FCNR(B), offering 5.25-6 percent interest for deposits with maturities of three to five years.
HDFC Bank and Central Bank of India are offering rates of up to 6 percent on longer-tenure deposits.
YES Bank and AU Small Finance Bank have raised rates to as much as 7.1 percent on five-year deposits.
CSB Bank is offering up to 7.05 percent.
Karur Vysya Bank is offering 7 percent on three-year and five-year US dollar FCNR(B) deposits.
Among major lenders, HDFC Bank increased FCNR(B) rates by 235-260 basis points in the three- to five-year segment, while YES Bank raised rates by 300-335 basis points for similar tenures.
Bankers expect the scheme to attract strong interest from NRIs after the RBI permitted a leverage structure that allows depositors to borrow overseas and place the funds in FCNR(B) accounts.
Under the arrangement, an NRI can invest a portion of personal capital, borrow additional funds from an overseas lender and use a standby letter of credit issued by an Indian bank as support for the foreign borrowing. This enables investors to benefit from the interest-rate differential between overseas borrowing costs and FCNR(B) deposit returns.
Brokerage estimates suggest that leveraged investors could generate significantly higher returns, depending on borrowing costs and leverage levels.
Market participants believe the revised framework could attract between $45 billion and $50 billion through FCNR(B) deposits alone, substantially higher than initial expectations following the RBI's announcement.
Economists note that the RBI's decision to absorb the hedging cost of FCNR(B) deposits helps neutralise currency-related costs for banks, enabling them to offer more attractive rates to depositors.
The latest repricing has narrowed the gap between FCNR(B) rates and domestic fixed-deposit rates at many banks. However, analysts believe most lenders are unlikely to offer rates significantly above domestic deposit rates for an extended period.
Pricing strategies are expected to vary from bank to bank, depending on individual funding requirements and alternative sources of capital.
With the RBI's special regulatory window remaining open until September 30, banks are expected to intensify efforts to attract NRI deposits and strengthen their foreign-currency funding base.
Industry observers expect more lenders to revisit FCNR(B) pricing in the coming weeks as competition for overseas deposits gathers momentum and banks seek to capitalise on growing NRI interest in dollar-denominated investments.