RBI to Bear Hedging Costs on NRI FX Deposits, Boosting Dollar Inflows

The Reserve Bank of India (RBI) has announced a move to ease the flow of foreign currency non-resident (bank) or FCNR (B) money into the country, with the central bank agreeing to bear the hedging costs on NRI FX deposits. This decision is expected to benefit overseas depositors, who may see higher interest rates offered by banks.

RBI to Bear Hedging Costs on NRI FX Deposits

The RBI’s move comes at a time when banks are facing difficulties in overall deposit mobilisation, with savers shifting preference to market-linked instruments. Inflows into FCNR (B) deposits plunged 87% in FY26 to $946 million from $7.076 billion in the preceding fiscal.

Senior bank executives said the central bank’s decision may allow them to offer higher rates by up to 50-100 basis points. “This decision creates clear headroom for banks to offer more competitive rates to NRI depositors during this window, and we expect the segment to see renewed momentum,” Indian Overseas Bank managing director Ajay Kumar Srivastava told ET.

Benefits of FCNR (B) Deposits

FCNR (B) deposits allow the Indian diaspora to park their overseas earnings in major foreign currencies in India without converting them into rupees. Such deposits can be placed in major foreign currencies like the dollar, euro, or pound sterling while protecting wealth against currency fluctuations.

Market Impact and Details

• The RBI has decided to offer banks a concessional swap facility covering the full hedging cost on fresh FCNR(B) deposit mobilisation with a three-to-five-year tenure.
• The facility will remain valid till September 30.
• Banks raise FCNR (B) deposits and convert the proceeds to local currency to lend within the country. For this, banks need to swap those funds.

Key Takeaways

• The RBI’s move is expected to boost dollar inflows through direct banking channels.
• Banks may offer higher rates by up to 50-100 basis points to NRI depositors.
• The facility will remain valid till September 30.

FAQs

What is the purpose of FCNR (B) deposits?

FCNR (B) deposits allow the Indian diaspora to park their overseas earnings in major foreign currencies in India without converting them into rupees.

How will the RBI’s move benefit NRI depositors?

The RBI’s move is expected to benefit NRI depositors by allowing banks to offer higher interest rates, making it more attractive for them to deposit their foreign currency earnings in India.

What is the duration of the concessional swap facility?

The facility will remain valid till September 30.

Conclusion

The RBI’s move to bear the hedging costs on NRI FX deposits is expected to boost dollar inflows through direct banking channels and make it more attractive for NRI depositors to park their foreign currency earnings in India. Banks may offer higher rates by up to 50-100 basis points to NRI depositors, making it a well-timed measure that materially lowers the effective cost of mobilising foreign currency funds. As Governor Sanjay Malhotra said, “We are hopeful of reasonable inflows, but we are not targeting any particular amount.”