RBI absorbs hedging costs to woo NRI deposits; What FCNR(B) investors can expect next

RBI absorbs hedging costs to woo NRI deposits; What FCNR(B) investors can expect next

The RBI has rolled out a special window aimed at attracting more foreign currency deposits from NRIs, a move that could help strengthen the country's foreign exchange reserves and boost overseas capital inflows.

Under fresh guidelines issued on June 8, authorised dealer banks can access an RBI swap facility for new and renewed Foreign Currency Non-Resident (Bank), or FCNR(B), deposits with maturities ranging from three to five years. The RBI's swap facility will be available only in US dollars.

The facility, available until September 30, allows banks to swap US dollar deposits with the central bank, helping them manage currency risks while offering competitive returns to NRI depositors. The measure echoes a similar strategy used during the 2013 balance-of-payments pressures.

Lakshmanan V, Group President & Head -Treasury (Treasurer), Federal Bank, said, "To attract foreign investments, all the following steps including increasing the universe of the Fully Accessible Route (FAR) securities, concessional forex swap to incentivize ECB’s by PSU’s, hedging cost concession for Authorized Dealer (AD) banks for raising fresh 3-5 year FCNR deposits and restore the time limit for realization of export proceeds to 9 months, are expected to arrest currency depreciation and bring inflow, giving stability to foreign exchange and bond markets."

It is a fixed deposit account that allows non-resident Indians (NRIs) to park their money in foreign currencies with Indian banks. Unlike NRE deposits, FCNR(B) deposits are maintained in designated foreign currencies such as the US dollar, pound sterling, euro, Japanese yen, Canadian dollar and Australian dollar.

The key advantage is that both the principal and interest remain protected from exchange rate fluctuations between the foreign currency and the Indian rupee. For example, if an NRI places a US dollar deposit in an FCNR(B) account, the deposit and the interest earned are repaid in US dollars at maturity, regardless of how the rupee moves during the tenure.

What returns can NRIs currently earn on FCNR (B) deposits?

FCNR(B) deposit rates currently range from about 3.85 percent to 5 percent across major banks on US dollar deposits. Bank of Baroda offers up to 5 percent on one- to two-year deposits, while SBI and Kotak Mahindra Bank offer around 4.40 percent. Axis Bank offers up to 4 percent, while ICICI Bank and HDFC Bank offer up to 3.85 percent and 3.95 percent, respectively.

Similarly, for rates for 3 year to 5 years deposits currently range from about 2.95 percent to 3.65 percent across major bank.

SBI, Bank of Baroda offer up to 3.35 percent on 3 to 5-year deposits, Kotak Mahindra Bank offers up to 3.4 percent. ICICI and Axis Bank offer up to 3.25 percent, while HDFC Bank offers 3.65 percent. Any RBI move to lower banks' hedging costs could create room for lenders to offer more competitive rates to attract NRI funds.

"Hedging forward cover is typically the largest margin deterrent for banks holding foreign currency liabilities. With the RBI taking this cost off their books, banks now have the margin room to pass these savings directly to depositors. One can expect banks to increase FCNR(B) rates for longer tenors to aggressively capture dollar inflows," said Vishal Lohia, Partner, Dhruva Advisors.

During the June 2026 MPC meeting, the RBI acknowledged a drastic drop in FCNR(B) inflows—plummeting from over $7 billion in FY25 to just $946 million in FY26.

To correct this, the RBI introduced a concessional swap facility valid until September 30, 2026, offering to absorb the full hedging costs for banks mobilising fresh 3 to 5-year FCNR(B) deposits.

FCNR(B) deposits are ideal for NRIs and OCIs whose future liabilities and capital consumption will be in a foreign currency. "It caters to those who want a completely risk-free, sovereign-backed dollar (or other forex) yield without taking on INR depreciation risk. It effectively allows the parking of foreign earnings in India while entirely bypassing the exchange rate volatility that eats into NRE returns," said Lohia.

The Income-tax Act provides specific carve-outs for these deposits, heavily reliant on the depositor's residential status under the Foreign Exchange Management Act, 1999 (FEMA).

"Interest income is exempt from tax. This exemption applies as long as the individual is a "person resident outside India" as defined under FEMA, or qualifies as a "Resident but Not Ordinarily Resident" (RNOR) under the Indian tax laws," said Lohia.

What are the other alternatives available?

Experts say that the same should depend entirely on the depositor’s view on INR stability and their risk appetite.

For locking in long-term sovereign yields, the RBI recently expanded the FAR for G-Secs (including new 15, 30, and 40-year papers). “Coupled with the government's recent move to scrap capital gains and withholding taxes (WHT) for certain foreign investments in government bonds, this is a highly lucrative alternative for large capital deployment,” said Lohia.

While these tax benefits are not available to NRIs/ OCIs, given these exemptions, one could see increased liquidity and consequently, better returns for all investors.

Parul Mittal Sinha, Head-Markets, India and South Asia & Co-Head, Macro Trading, ASA, Standard Chartered Bank, said, "RBI has expanded the FAR universe to include the current on-the-run 15-year, 30-year, and 40-year Indian Government Bonds (IGBs).

Additionally, the government has released an ordinance exempting WHT and capital gains tax on FPI (Foreign Portfolio Investors) investments in IGBs. We expect these tax exemptions to make investing in IGBs compelling for many foreign investors, and also significantly strengthen the case for inclusion of Indian Govt bonds in the Bloomberg Global Aggregate Index."

"Another alternative that could be considered is foreign currency fixed deposits in IFSC Banking Units as they could offer slightly more aggressive pricing than mainland FCNR(B) deposits due to lighter reserve requirements, while maintaining identical tax exemptions," added Lohia.

An IFSC Banking Unit (IBU) is a specialized offshore branch of an Indian or foreign bank that operates within India’s International Financial Services Centres (IFSC), mainly at GIFT City in Gujarat.

Following the announcement and the special FCNR(B) swap window introduced in September 2013, several banks sharply raised deposit rates. For US dollar FCNR(B) deposits, rates that had generally been around 3.5 percent to 4.5 percent moved to roughly 5.5 percent to 7 percent, depending on the bank and tenure. Some banks briefly offered rates near or above 7 percent on select maturities as they competed aggressively for NRI money.

The key question is whether the 2026 incentive can produce a similar jump. With the rate differential between India and the US much narrower compared to 2013, the uplift from the swap facility might not be as dramatic as 2013.Some experts estimate that if banks pass on the full benefit of RBI's hedging-cost support, rates could potentially rise toward 6 percent to 6.5 percent, although no bank has announced revised rates yet.

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