India’s NRI Deposits Crisis: FCNR(B) Strategy and Policy Shift

Context

Given the fierce competition in global interest rates, FCNR(B) deposits are becoming an important option for NRIs to invest in foreign currencies in India in a stable manner.

What is FCNR(B) Deposit?

• FCNR(B) (Foreign Currency Non-Resident Bank) Deposit enables the NRIs/OCIs to carry on the fixed deposits in rupees in Indian banks with foreign currency denominations such as USD, GBP, EUR, JPY, AUD, CAD etc.
• Interest income is tax-free in India which means it is a good investment option for diaspora savings.
• Deposits enable banks to have access to foreign currency funding which is stable and whose conversion is not imminent.

Recent Trend in FCNR(B) Inflows

• FCNR(B) inflows fell precipitously by 86% to $946 million in FY26 compared to $7.1 billion in FY25.
• The outstanding FCNR(B) deposits amount to approximately $33.8 billion.
• However, total NRI deposits increased marginally by $165.65 billion with a corresponding increase in rupee denominated deposits.

Why FCNR(B) Deposits Are Losing Appeal

• Both domestic and global markets provide better returns (around 4% or above) in comparison to the FCNR(B) rate in India (around 2.9%-3.6%).
• Currently, Indian banks provide:
  • SBI: ~2.95%–3.35%
  • HDFC Bank: ~3.4%–3.65%
  • ICICI Bank: ~2.9%–3.0%
• The yields on competing US CDs are in the range of 4.2%–4.3% which is not as attractive as India.

RBI Intervention and Policy Shift

• RBI has extended the tenure of fresh FCNR(B) deposits to Sept 2026 (3–5 years).
• Adopted a concessional swap facility.
• Risk of forex transactions has been minimised, which beneficially affects banks’ profit margins.
• If rates become competitive, RBI estimates that there are potential inflows of $50–70 billion.

Why Higher Interest Rates May Be Needed

• Experts say that a hike of at least 100 basis points is needed to lure NRIs.
• If there are no competitive returns, the funds could keep going to the US/Europe.
• Some of the advantages of arbitrage are lessened by the global level of stability in interest rates (Fed pause).
• Banks must balance:
  • Attracting deposits
  • Maintaining profitability
  • Managing currency risk

Way Forward

• The banks should implement dynamic FCNR(B) pricing based on the international benchmarks.
• RBI may consider:
  • Extended swap windows
  • Partial hedging subsidies
  • Offer interest for term deposits.
• Digital onboarding of NRIs to be improved for better participation.
• Expand the investment ecosystem for those who are from India but overseas, beyond deposits (bonds, sovereign instruments).

Conclusion

• FCNR (B) deposits will continue to serve as an important tool to ensure stability in India’s external sector.
• But competition from the rates around the world is slowing inflows.
• The calibrated blend of elevated return + risk hedge protection support + policy stability is crucial to revive NRI dollar inflows and enhance forex position of India.

Source: The Indian Express

Mains PYQ

Q. Do you agree that Indian economy has recently experienced V–shaped recovery? Give reasons in support of their answer. (2021)

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