FCNR(B) Deposits – What can make this scheme attractive to NRIs?

The FCNR(B) scheme is being offered to the NRIs with a lot of fanfare. Under the new model, the RBI will bear the currency risk of FCNR(B) deposits for a tenure of 3-5 years, for a limited deposit collection period up to September 2026. Will it work?

Expected to bring in $50 billion of NRI money

Early estimates are out and they indicate that banks could attract between $40 billion and $50 billion of NRI deposits through the FCNR(B) scheme. The reasons are not far to seek. In the portfolio of deposits offered to NRIs, the FCNR scheme is where the forex risk is covered by the banks, and it is more of a time deposit in nature. In this special window, the banks can swap their forex exposure with the RBI, so for the bank the forex risk of FCNR deposits becomes zero. This allows them to aggressive market these FCNR(B) deposits to NRIs, and also to offer them a higher rate of interest.

Can a higher rate make FCNR(B) attractive to NRIs?

Prima facie, it looks like a simple equation. An NRI was earning about 3.5% to 4.0% on a dollar FCNR deposit prior to the new hedging rule. Banks would not pay more than that, as they assumed the cost of hedging the forex exposure. In the new model, the RBI takes on the forex hedging cost, so the bank can actually offer a much higher rate to the NRIs. For instance, HDFC Bank which was offering 3.65% on its dollar FCNR deposits to NRIs has already raised the rates by a substantial 2.35% to make it 6.0%. There are other banks who have even raised the rates on FNCR(B) dollar deposits to 7.0%. Will this shift really lead to a deluge of FCNR(B) deposits into India?

NRI flows will depend on rates and leverage

To understand whether current rates are attractive, let us compare with a similar strategy deployed during “Taper Tantrum” of 2013. Back then, the rate of interest offered by US banks on dollar deposits was around 0.25% and the FCNR deposits were offering around 5.5% on an average. The spread was huge and the FCNR deposits obviously became a hit with NRIs. Currently, US bank deposits are offering 4.5% to 4.6%. Even if FCNR(B) offers 7.0%, the spread is 2.4%, which may not be sufficient to cover differential risk. Rates of 8.0% to 8.5% may be needed. The second issue is if NRIs can borrow and invest in the FCNR(B), which promises substantial NRI flows. Currently, the economics do not fit in.

There is a much bigger risk for RBI to contend with

The real risk for the RBI would be whether it can manage to cover its risk back-to-back, or whether it would still be exposed to price risk. We have seen in the case of gold bonds, how unhedged government losses became so prohibitive that it had to discontinue the scheme. For RBI, risk could arise from sovereign ratings, market liquidity, or currency moves. For instance, if the rupee depreciates sharply, then the RBI ends up underwriting the cost of the guarantee given to banks. If the FCNR(B) attracts close to $70 billion, then the risks can be huge. Government cannot afford another unhedged SGB like scenario. In 2013, government was lucky and macros were favourable. That may not repeat in 2026!