Lenders have approached the RBI to allow existing NRI customers to prematurely close and rebook FCNR(B) deposits to benefit from significantly higher interest rates.
Interest rates on three- to five-year FCNR(B) deposits have risen to 6%-7.1%, compared with 3.35%-4% earlier, after the RBI introduced a concessional swap window.
The scheme is aimed at attracting foreign currency deposits, with industry estimates suggesting it could bring $60-70 billion into India's financial system.
Why NRIs Are Rushing to Break Old Deposits and Reinvest at Higher Rates
Banks have approached the RBI seeking permission for existing NRI customers to prematurely withdraw and rebook FCNR(B) deposits, as the central bank's special swap window has pushed deposit rates as high as 7.1%
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Commercial banks have approached the Reserve Bank of India (RBI) seeking permission to allow existing non-resident Indian (NRI) customers to prematurely withdraw and rebook their Foreign Currency Non-Resident (Bank), or FCNR(B), deposits to take advantage of the recently launched special deposit scheme offering significantly higher returns, according to a report by The Economic Times.
The request comes after several banks rolled out enhanced FCNR(B) deposit rates following the RBI's decision to introduce a concessional foreign currency swap window until September 30. The facility effectively transfers the cost of currency hedging from banks to the central bank, allowing lenders to offer substantially higher returns to depositors.
Under the special scheme, banks are currently offering interest rates ranging from 6% to 7.1% on three- to five-year FCNR(B) deposits, compared with the 3.35% to 4% rates available earlier.
According to bankers cited by the report, some large depositors have already begun instructing banks to prematurely close existing deposits and redeploy the funds into new FCNR(B) schemes, while others are shifting deposits across banks to access higher returns.
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However, the RBI's incentive applies only to fresh deposits and those that have matured, meaning existing FCNR(B) deposits continue to earn the lower contracted rates.
As a result, banks are seeking regulatory clarity on whether existing depositors can be allowed to prematurely close and rebook deposits under the new framework.
Under current RBI rules, FCNR(B) deposits carry a mandatory lock-in period of one year. If a depositor withdraws funds before completing one year, no interest is paid. For withdrawals after one year but before maturity, banks typically levy a penalty by reducing the contracted interest rate by one percentage point.
Key lending giants, including State Bank of India (SBI) and ICICI Bank, launched revised FCNR(B) deposit schemes this week offering higher interest rates to attract foreign currency deposits from NRIs.
The RBI announced the special swap facility earlier this month as part of a broader effort to attract foreign currency inflows, strengthen foreign exchange reserves and support the rupee amid global market volatility.
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Industry estimates suggest the scheme could attract between $60 billion and $70 billion in fresh foreign capital.
FCNR(B) accounts allow NRIs, Persons of Indian Origin (PIOs) and Overseas Citizens of India (OCIs) to maintain deposits in foreign currencies with Indian banks. The accounts are popular among overseas Indians because they eliminate currency conversion risks and offer tax-free interest income in India.
With deposit rates now significantly higher and hedging costs absorbed by the RBI, banks expect strong interest from NRIs looking to lock in attractive returns over the coming months.