Economic Times1 hour agoBusiness2 min readIndia

Indian Banks Slash FCNR Deposit Rates After RBI Swap Window Closure

State Bank of India, HDFC Bank, and ICICI Bank reduce foreign-currency deposit rates by up to 310 basis points following the closure of the Reserve Bank of India's special swap window.

fcnr reserve bank of india interest rates

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Indian banks have sharply reduced interest rates on foreign-currency deposits following the early closure of the Reserve Bank of India's special FCNR(B) swap window, which had previously attracted $65.4 billion in inflows.

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Why It Matters

The Reserve Bank of India introduced a special dollar-rupee swap facility in June to attract foreign-currency deposits.

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Mumbai: Indian banks have rolled back the unusually high interest rates offered on foreign-currency deposits after the Reserve Bank of India’s (RBI) special FCNR(B) swap window closed Monday, ending a ten-week scramble for overseas funds amid an unprecedented run of diaspora commitments.

State Bank of India (SBI), HDFC Bank and ICICI Bank sharply reduced interest rates on long-tenure foreign currency non-resident deposits, unwinding the unusually high returns offered on dollar commitments since the special window was operationalized June 8.

HDFC Bank has reduced its five-year US dollar FCNR(B) rate to 3.15% from 6.25%, a cut of 310 basis points, effective September 1.

One basis point is a hundredth of a percentage point.

ICICI Bank has similarly cut its five-year dollar deposit rate to 3.25% from 6.25%. The bank had raised rates on three-to-five-year FCNR(B) deposits after the RBI introduced the special facility in June.

SBI’s regular five-year FCNR(B) rate is now 3.05%, compared with 5.75% offered for deposits of up to $1 million under its Advantage FCNR(B) scheme, implying a 270-basis-point reduction.

For deposits above $1 million, SBI had offered 6%, translating into a 295-basis-point difference from the current rate.

“Deposit mobilisation is expected to remain supportive of banks’ funding conditions, although the recent FCNR(B)-led boost is likely to moderate as the facility winds down,” said Sanjay Agarwal, senior director, CareEdge Ratings. “The strong mobilisation under the scheme has provided banks with an additional source of foreign currency funding and improved near-term liquidity flexibility.”

The sharp reset shows banks rapidly unwinding the premium they were willing to pay for long-duration dollar deposits once the RBI-supported economics of raising such funds disappeared.

Banks had aggressively raised three-to-five-year FCNR(B) rates after the central bank introduced a special dollar-rupee swap facility in June, which lowered the effective cost of mobilising foreign-currency deposits and enabled lenders to offer substantially higher returns to non-resident depositors.

The facility drew strong inflows.

Indian banks collectively mobilised $65.4 billion through FCNR(B) deposits by August 21, while overall foreign-currency inflows under the RBI’s facilities, including overseas borrowings, reached $73 billion. The strong response prompted the RBI to advance the closure of the FCNR(B) window to August 31 from the earlier September 30 deadline.

The sharp fall in three-to-five-year rates, even as shorter-tenure rates remain broadly stable, suggests banks are no longer willing to pay the exceptional premium on long-term dollar deposits without the benefit of the RBI swap facility.

“Given substantial debt issuance completed recently, banks could cross our estimated range of raising $70-80bn, landing at $90-100bn by Aug 31,” Jefferies said in a report. “Liquidity has improved even as RBI is extracting part of it. So, better liquidity will benefit NBFCs & small private banks.”