Indian banks are raising interest rates on Foreign Currency Non-Resident (Bank), or FCNR(B), deposits in an effort to attract dollar inflows amid a rising global rate environment. ICICI Bank and HDFC Bank have already adjusted their offerings for dollar deposits, responding to higher overseas borrowing costs and increased competition among lenders for foreign currency funds. India is the world's largest recipient of remittances, and NRI deposits such as FCNR(B) accounts represent a significant channel for foreign exchange inflows into the country.

The rate adjustments come as global benchmark interest rates have climbed since a special scheme designed to attract foreign currency deposits became operational in June. The scheme is scheduled to remain available until September 30, providing banks a limited window to draw in overseas dollar funds through these deposit instruments.

FCNR(B) deposits allow non-resident Indians (NRIs) and persons of Indian origin to park foreign currency earnings in term deposits with Indian banks. These deposits are maintained in permitted foreign currencies — including the US dollar, British pound, euro, Japanese yen, Canadian dollar, and Australian dollar — and are denominated in the currency of deposit rather than in Indian rupees. Unlike Non-Resident External (NRE) accounts, FCNR(B) deposits shield depositors from rupee exchange-rate fluctuations, as both principal and interest are payable in the foreign currency of deposit.

Under Reserve Bank of India (RBI) regulations, FCNR(B) deposits can be opened for tenures ranging from one to five years. Banks offering these deposits must maintain appropriate hedging arrangements to manage the currency risk associated with accepting foreign currency liabilities. The interest rates on FCNR(B) deposits are typically linked to international benchmark rates, which means that as global rates rise, banks face pressure to offer more competitive returns to attract depositors.

The current round of rate increases by Indian lenders reflects broader trends in international money markets, where central banks around the world have tightened monetary policy, pushing up the cost of dollar funding. For Indian banks, attracting dollar deposits through FCNR(B) accounts serves as one mechanism to shore up foreign exchange liquidity and support the country's balance of payments position. India has previously leveraged FCNR(B) instruments during periods of external pressure, including a dedicated swap window introduced by the RBI in 2013 that mobilized approximately $34 billion in dollar deposits over a similar limited-time framework.

The special foreign currency attraction scheme, which incentivizes banks to mobilize overseas deposits, is set to close on September 30. Whether other major lenders such as State Bank of India follow HDFC Bank and ICICI Bank in revising their FCNR(B) rates will influence the competitive landscape in the remaining weeks. Market participants are watching whether the combination of higher deposit rates and the limited duration of the scheme will result in a meaningful increase in dollar inflows before the deadline.

Source: Economic Times Markets