RBI to bear full hedging cost on FCNR(B) deposits

Kolkata: The Reserve Bank of India has offered to bear the full hedging cost of mobilising medium to long term foreign currency denominated non-resident deposits, throwing a major relief to banks raising overseas funds.

Governor Sanjay Malhotra expects banks to pass on the benefit to overseas depositors by way of higher interest rates. Senior bank executives said that the move may allow them to offer 50-100 basis points higher rates.

"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.

The move comes at a time when banks are facing difficulties in overall deposit mobilisation with savers shifting preference to market-linked instruments and the inflows into foreign currency non-resident (bank) deposits plunged 87% in FY26 to $946 million from $7.076 billion in the preceding fiscal.

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This is expected to boost dollar inflows too through direct banking channels, according to senior bank executives.

"We are hopeful of reasonable inflows but we are not targeting any particular amount," RBI Governor Sanjay Malhotra said.

The central bank has decided to offer banks a concessional swap facility covering the full hedging cost on fresh FCNR(B) deposit mobilisation with three to five years tenure. The facility will remain valid till September 30.

"It is a well-timed measure that materially lowers the effective cost of mobilising foreign currency funds," IOB's Srivastava said.

Banks raise foreign currency non resident (bank) deposits and convert the proceeds to local currency to lend domestically. For this, banks need to swap those funds.

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