Indian Banks Cut FCNR Deposit Rates by Up to 310 Basis Points After RBI Window Closes
Indian banks have sharply reduced interest rates on long-tenure foreign-currency non-resident (FCNR-B) deposits after the Reserve Bank of India's (RBI) special FCNR(B) swap window closed on Monday, ending a ten-week push to attract overseas funds. The rollback unwinds the unusually high returns that lenders had offered on dollar deposits since the special facility was operationalised in June.
State Bank of India (SBI), HDFC Bank, and ICICI Bank all cut rates on long-tenure FCNR(B) deposits, according to reports from The Economic Times and Outlook Business.
Rate Reductions
HDFC Bank reduced its five-year US dollar FCNR(B) deposit 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 made a similar reduction, lowering its five-year dollar deposit rate to 2.90% from 6.00%, also a cut of 310 basis points. Both lenders had raised rates sharply on three-to-five-year FCNR(B) deposits after the RBI introduced the special facility.
SBI also reset its rates. Its regular five-year FCNR(B) rate now stands at 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.
Background of the Special Window
The RBI introduced the special dollar-rupee swap facility in June, which reduced banks' effective cost of raising foreign-currency deposits, allowing them to offer higher returns to non-resident depositors. The move triggered a strong response from overseas depositors.
According to reports, Indian banks collectively mobilised $65.4 billion through FCNR(B) deposits by August 21, while total foreign-currency inflows through RBI-supported facilities, including overseas borrowings, reached $73 billion.
The strong mobilisation led the RBI to bring forward the closure of the special FCNR(B) window to August 31, from the earlier September 30 deadline.
Analyst View
Sanjay Agarwal, senior director at CareEdge Ratings, said, "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."
The steep rate reductions indicate that banks are withdrawing the premium they had been willing to pay for longer-duration dollar deposits once the economics supported by the RBI swap facility disappeared. The reset has been particularly sharp for three-to-five-year deposits, while shorter-tenure rates have remained broadly stable, suggesting banks are no longer prepared to pay unusually high returns for longer maturities.