RBI’s Special Dispensation Boosts US Dollar Inflows with Higher Interest Rates for NRIs

Smaller lenders are offering over 7% on USD deposits in a bid to attract FCNR(B) deposit rates, intensifying competition among banks to attract foreign currency deposits from Non-Resident Indians (NRIs).

RBI’s Special Dispensation Boosts US Dollar Inflows

The Reserve Bank of India’s recent measures have made it more attractive for banks to garner overseas funds, including exemption from CRR and SLR requirements on incremental FCNR(B) deposits mobilised under the scheme and a facility under which the central bank will bear the hedging cost on eligible deposits.

This move is aimed at boosting US dollar inflows, and several lenders have sharply raised interest rates on Foreign Currency Non-Resident (Bank) deposits in response.

Smaller Lenders Lead the Rate Hikes

Smaller and mid-sized lenders have led the rate hikes, with some offering more than 7 per cent on US dollar FCNR(B) deposits with tenures of three to five years.

Market Impact and Details

UCO Bank is providing 7.20 per cent on five-year FCNR(B) deposits and 6.66 per cent on three-year deposits.
DCB Bank is offering 7.13 per cent for both three-year and five-year tenures.
CSB Bank is offering 6.95 per cent for three years and 7.05 per cent for five years.
Bandhan Bank has announced a flat 7 per cent rate for both three-year and five-year deposits.
Karnataka Bank is offering 6.50 per cent for three years and 7 per cent for five years.

Among large private sector lenders, ICICI Bank, Axis Bank and Federal Bank are offering 6 per cent on both three-year and five-year FCNR(B) deposits.

Kotak Mahindra Bank is offering between 6 per cent and 6.15 per cent, depending on deposit size and tenure.

Punjab National Bank (PNB) is offering 6.00 per cent on three-year FCNR(B) deposits and 6.10 per cent on five-year deposits.

Key Takeaways

Smaller lenders are offering over 7% on USD deposits to attract FCNR(B) deposit rates.
The RBI’s special dispensation has made it more attractive for banks to garner overseas funds.
Market participants expect the measures to generate substantial foreign currency inflows.

FAQs

What is the RBI’s special dispensation for FCNR(B) deposits?

The RBI’s special dispensation includes exemption from CRR and SLR requirements on incremental FCNR(B) deposits mobilised under the scheme and a facility under which the central bank will bear the hedging cost on eligible deposits.

What are the benefits of FCNR(B) deposits for NRIs?

FCNR(B) deposits offer a higher interest rate compared to domestic deposits, making them an attractive option for NRIs looking to earn a higher return on their foreign currency deposits.

What are the estimated foreign currency inflows expected from the RBI’s relaxation?

Market participants expect the measures to generate substantial foreign currency inflows, with estimates ranging from $35 billion to $70 billion.

Conclusion

The RBI’s special dispensation has intensified competition among banks to attract foreign currency deposits from Non-Resident Indians (NRIs), with smaller lenders leading the rate hikes.

As a result, NRIs can now earn higher interest rates on their foreign currency deposits, making it an attractive option for those looking to earn a higher return on their overseas funds.

We recommend that NRIs consider exploring FCNR(B) deposit options with smaller lenders to take advantage of the higher interest rates on offer.