SBI, ICICI Bank and HDFC Bank raised rates on FCNR(B) foreign currency deposits after the Reserve Bank of India announced a foreign currency swap window that reduced banks' currency hedging costs and enabled them to offer higher returns to non resident Indians.
RATIONALE AND RBI ACTION
The rate increases followed an RBI move to open a swap facility for certain foreign currencies, an action that eased the immediate cost for banks to hedge foreign currency liabilities. That reduction in hedging expense allowed banks to reprice outward facing deposit products, including FCNR(B) accounts, which are used by non resident Indians to hold term deposits in foreign currencies.
Banks had faced higher hedging costs amid currency volatility and tight global dollar liquidity, which made it more expensive to offer competitive foreign currency yields to overseas depositors. The Reserve Bank of India’s swap window announcement changed that equation, and major lenders moved quickly to signal improved pricing on FCNR(B) products to capture deposits from the NRI customer base.
SBI, ICICI Bank and HDFC Bank positioned their rate changes as targeted efforts to attract fresh foreign currency inflows and to retain existing NRI balances. The trio of lenders, which together hold a sizeable portion of overseas rupee-linked and foreign currency retail deposits, sought to use improved deposit pricing as a lever in what remains a competitive market for cross border retail funding.
MARKET IMPLICATIONS AND CONTEXT
The move had implications for banks' funding mixes and the foreign exchange market. By raising FCNR(B) deposit yields, banks aimed to increase foreign currency retail deposits that do not create immediate onshore rupee liabilities, a useful source of stable external funding. The RBI swap window reduced the immediate cost and risk of converting such liabilities or hedging them, which made the product economics more favorable for lenders.
For the broader market, a surge in NRI foreign currency deposits can support external financing buffers and ease some pressure on the domestic foreign exchange market. That said, banks must balance the cost of higher deposit yields against the benefits of low-risk, stable funding. Higher FCNR(B) rates also intensified competition among lenders seeking incremental offshore retail balances, with pricing becoming one of the primary tools for customer acquisition.
FCNR(B) accounts are a long established channel for non resident Indians to park funds in currencies such as the US dollar, euro and pound, while earning fixed returns. The product typically appeals to customers seeking currency diversification and a hedge against domestic currency volatility. Banks increased rates to ensure those customers found Indian lenders' offerings attractive relative to global alternatives.
Regulatory considerations remained relevant. The RBI's intervention via a swap facility was explicitly aimed at lowering hedging costs for banks, and thus supporting market functioning and bank liquidity in foreign currencies. The sequence of central bank action followed by bank pricing moves reflected a coordination between monetary authorities' market tools and banks' commercial response in deposit pricing.
Industry observers noted that such shifts in deposit pricing tend to occur quickly after changes in hedging cost dynamics, as banks race to secure low-cost and stable foreign currency resources. While the immediate trigger in this instance was the RBI swap window announcement, the underlying drivers included cross border capital flows and global currency market conditions that influenced cost of funding for Indian lenders.
Sources: The Hindu Business Line Banking