The Reserve Bank of India (RBI) has opened the floodgates for foreign capital by allowing Indian banks to route money from overseas branches to non-resident Indians for deposits back home under a revamped FCNR(B) scheme, while also removing key currency and credit risks to spur inflows, according to a Business Today report.
Key Features of the Revamped FCNR(B) Scheme
The RBI's special swap window absorbs the currency hedging costs for fresh 3-to-5-year tenors, enabling Indian banks to aggressively price FCNR(B) deposits at attractive fixed rates of 6% to 7%. If an overseas investor can borrow funds internationally at a lower floating rate (e.g., 5-5.5%), they pocket the difference on the leveraged portion. On paper, this leverage can theoretically amplify a standard 6% fixed-income dollar yield into double-digit returns, often marketed between 12% to 19%, the source reported.
Banks have been allowed to offer differential interest rates to customers, but only based on two parameters: the tenor of the deposit and the size of the deposit. They cannot arbitrarily offer preferential rates. Meanwhile, banks are not required to use the new RBI swap facility for every 3-to-5-year deposit they mobilise; they can continue offering conventional foreign currency deposits without a mandatory one-year lock-in.
| Feature | Details |
|---|---|
| Deposit Tenor | Fresh 3-to-5-year tenors eligible for swap |
| Fixed Rate Offered | 6% to 7% |
| Overseas Borrowing Cost | 5-5.5% (floating) |
| Theoretical Leveraged Return | 12% to 19% |
| Differential Interest Allowed | Based only on tenor and deposit size |
| Mandatory Lock-in | Not required for conventional FCNR(B) |
Credit Risk Elimination via Standby Letter of Credit
The second dispensation that will have a multiplier effect on NRI deposits is the permission granted to Indian banks to eliminate the credit risk for overseas lenders. Banks have been allowed to issue a standby letter of credit in favour of overseas lenders against FCNR(B) deposits. The chances of an NRI defaulting on loans taken against FCNR(B) deposits are minimal, as this standby letter of credit guarantees repayment to the offshore bank that has lent against the outstanding deposits, the RBI clarified through a frequently asked questions (FAQ) document issued over a fortnight after it announced the special FCNR(B) deposit scheme.
"The RBI has also said that the free forex hedge is only on the principal deposit and not interest that banks pay out." — Source: Business Today quoting RBI FAQ
The math relies entirely on a positive interest rate spread, the source noted.
Swap Window and Hedging Details
Among other clarifications, the RBI said that it will swap deposits booked under the scheme that have a residual maturity of less than three years, and not "at least three years" as proposed earlier. This adjustment provides greater flexibility for banks and depositors.
The RBI's special swap window absorbs the currency hedging costs for fresh 3-to-5-year tenors, effectively making the FX hedge free on the principal amount. This directly reduces the cost of capital for banks mobilising these deposits, which can in turn lower overall funding costs in the economy.
Implications for Trade Finance and Capital Flows
For finance executives and treasury professionals, the revamped FCNR(B) scheme represents a significant channel for foreign capital inflows into India. By removing currency hedging costs (on principal) and credit risk (via standby LCs), the RBI has created an attractive arbitrage for overseas investors. The influx of deposits is expected to strengthen the rupee and improve liquidity in the forex market, potentially lowering hedging costs for trade finance transactions. Banks may pass on the lower funding costs to corporate borrowers, including those engaged in international trade.
However, the benefit is limited to the principal; interest payouts remain exposed to currency fluctuations. Treasury teams should monitor the spread between overseas borrowing rates and the fixed FCNR(B) rates to assess the net benefit. The facility also allows banks to continue conventional deposits without lock-in, preserving flexibility for managing liability profiles.
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