RBI’s Latest Measures to Attract NRI Deposits – Explained

NRI Deposits Latest News

• The Reserve Bank of India (RBI) has temporarily withdrawn interest rate ceilings on certain FCNR(B) and NRE deposits, while also introducing a special swap facility to encourage higher foreign currency inflows from Non-Resident Indians (NRIs).

FCNR(B), NRE and NRO Accounts

• India offers specialised banking accounts for Non-Resident Indians (NRIs) to facilitate savings, investments, and remittances.
• Foreign Currency Non-Resident (Bank) [FCNR(B)] Account
• An FCNR(B) account is a fixed deposit account maintained in foreign currency.
• Key features include:
  • Deposits are maintained in designated foreign currencies such as the US Dollar, Pound Sterling, Euro, Australian Dollar, Canadian Dollar, and Singapore Dollar. 
  • Depositors are protected from exchange rate fluctuations because both principal and interest are repaid in the same foreign currency. 
  • Interest earned is exempt from Indian income tax. 
  • Deposits are generally available for maturities ranging from one to five years. 
• FCNR(B) deposits are particularly attractive for NRIs seeking foreign currency returns without taking exchange rate risk.

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Non-Resident External (NRE) Account

• An NRE account is a rupee-denominated account used to park foreign earnings in India. Key features include:
  • Deposits are made using foreign currency and converted into Indian rupees. 
  • Both principal and interest are fully repatriable. 
  • Interest income is tax-free in India. 
  • Available as savings, current, recurring, or fixed deposit accounts. 
• NRE accounts are primarily used by NRIs to maintain and manage overseas earnings in India.

Non-Resident Ordinary (NRO) Account

• An NRO account is meant for managing income earned in India. Sources of funds may include Rent, Dividends, Pension, Interest income and Other domestic earnings. 
• Key features include:
  • Account is maintained in Indian rupees. 
  • Interest income is taxable in India. 
  • Repatriation is permitted subject to prescribed limits and regulatory conditions. 
• NRO accounts are generally used to manage domestic income streams while residing abroad.

News Summary

• The RBI has temporarily withdrawn interest rate ceilings on:
  • Fresh FCNR(B) deposits with maturities between three and five years. 
  • Fresh NRE deposits with maturities of three years and above. 
  • The relaxation is effective from June 17, 2026, to September 30, 2026.
• The measure is aimed at attracting larger foreign currency inflows at a time when policymakers are seeking to strengthen external sector stability and support the rupee.
• The RBI has clarified that transfers from NRO accounts to NRE accounts will not qualify for the exemption.

Special Swap Facility for FCNR(B) Deposits

• A key element of the RBI’s strategy is the introduction of a concessional foreign exchange swap facility for FCNR(B) deposits.
• Traditionally, when banks receive FCNR(B) deposits in foreign currency, they convert these funds into rupees for lending purposes. 
• This creates exchange rate risk because the bank must eventually repay the deposit in foreign currency.
• To manage this risk, banks hedge their currency exposure, which typically costs around 2.9% to 3% annually.
• Under the new arrangement, the RBI effectively absorbs a significant part of this hedging burden, reducing costs for banks and enabling them to offer higher interest rates to NRI depositors.

Sharp Increase in Deposit Rates

• Following the RBI’s announcement, several major banks significantly increased FCNR(B) deposit rates. Leading banks such as HDFC Bank, ICICI Bank, Axis Bank and Bank of Baroda are now offering interest rates of around 5.75% to 7% on three-to-five-year FCNR(B) deposits.
• Some banks raised rates by more than 300 basis points, making FCNR(B) deposits substantially more attractive than before.
• According to market experts, the yield advantage over comparable overseas deposits has widened to nearly 200-300 basis points.

Attractiveness Compared to Overseas Deposits

• The revised rates have made Indian FCNR(B) deposits highly competitive relative to foreign fixed-income products. For example:
  • Large US banks currently offer around 0.03% to 2% on comparable long-term certificates of deposit (CDs)
  • Smaller US banks offer approximately 4% to 4.2%
  • Indian FCNR(B) deposits are now offering as much as 7%
• This differential has significantly improved the attractiveness of FCNR(B) deposits for NRIs, especially those residing in regions such as the Gulf where foreign interest income may not face additional taxation.

Expected Capital Inflows

• Banks and analysts expect substantial inflows under the scheme. According to RBI data:
  • Outstanding NRE deposits stood at around $7.94 billion in FY26. 
  • Outstanding FCNR(B) deposits stood at approximately $946 million. 
  • Goldman Sachs estimates that the latest measures could attract between $30 billion and $50 billion in inflows during 2026.
• For comparison, a similar FCNR(B) mobilisation programme launched during the 2013 currency crisis generated nearly $25 billion in deposits.

Implications for the Economy

• The RBI’s measures are expected to:
  • Strengthen foreign exchange reserves
  • Improve dollar liquidity in the banking system
  • Support the rupee against external pressures 
  • Lower funding costs for banks
  • Facilitate overseas borrowing by public sector entities
• At a time of global uncertainty and volatile capital flows, attracting stable NRI deposits can provide an important buffer for India’s external sector.

Source: IE | TH