FCNR(B) deposits: Why higher interest rates may be needed to bring in NRI dollars

📌 Summary:

• RBI allowed banks to raise fresh 3–5 year FCNR(B) deposits until Sept 2026 and swap them with RBI at a concessional rate, effectively covering the full hedging cost — making overseas funding cheaper for banks
• Experts estimate the move could attract an extra $50–70 billion in foreign capital, if banks set the right rates
• Regulatory incentive alone may be insufficient: with US dollar deposits offering 4%+, Indian banks may need to raise FCNR(B) rates by at least 100 bps to stay competitive for NRIs
• FCNR(B) inflows crashed 86% in FY26 to $946 million (from $7.1 billion in FY25); outstanding rose to $33.8 billion at end-March
• FCNR(B) = fixed-term deposits opened by NRIs/OCIs/PIOs in foreign currencies (USD, GBP, EUR, JPY, AUD, CAD); interest is income-tax-exempt for non-residents
• Current FCNR(B) rates run 250–300 bps below rupee FDs (SBI ~3.35% vs rupee FD 6.3%)

🎯 UPSC Relevance: GS3 Economy — external sector, capital flows, rupee stability, banking; RBI's currency-management toolkit amid West Asia-driven outflows

📝 Prelims Facts:

• FCNR(B) = Foreign Currency Non-Resident (Bank) deposit; 1–5 year tenure
• 1 basis point = 0.01%
• Interest exempt from income tax for non-residents
• Concessional RBI forex swap lets banks avoid bearing hedging cost

🔑 Key Term: Hedging — protection against forex exchange-rate risk; RBI is absorbing this cost via a concessional forex swap to attract NRI dollars