Indian banks slash FCNR deposit rates by up to 310 basis points after RBI swap window closure

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 operationalised June 8.

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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 2.90% from 6.00%, also a reduction of 310 basis points. 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 5-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.

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Banks Slash FCNR Deposit Rates by Up to 310 Basis Pts

"Deposit mobilisation is likely 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.

Also Read: Numbers Boost: FCNR-B inflows help banks cut expensive bulk deposits

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.