Key facts
- RBI has launched FCNR(B) and ECB swap windows to improve liquidity and stabilize the rupee.
- The FCNR(B) window offers a zero hedging cost for banks and is operational from June 8 to September 30, 2026.
- Deposits raised via FCNR(B) are exempt from CRR and SLR requirements.
- Banks are offering higher FCNR(B) rates, ranging from 6-7%, reflecting the hedging benefit.
- A separate facility offers concessional hedging for ECB at 1.5% per annum.
- These measures are expected to attract $40-50 billion in inflows by FY27.
The Reserve Bank of India (RBI) has launched two foreign exchange swap facilities, the FCNR(B) deposit window and a concessional swap for external commercial borrowings (ECB), aimed at bolstering foreign exchange reserves, stabilizing the Indian rupee, and easing funding costs for banks.
The FCNR(B) window, operational from June 8, 2024, to September 30, 2026, allows banks to accept deposits with tenors of three to five years. Crucially, banks can swap these proceeds into rupees at zero hedging cost, and these deposits are exempt from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements. This represents a significant improvement from the 2013 scheme, which involved a 3.5% hedging fee.
Banks have responded by increasing FCNR(B) deposit rates by 200-300 basis points to 6-7%, passing on the benefit of reduced hedging costs to depositors. Analysis suggests that Non-Resident Indian (NRI) depositors, potentially using leverage, could achieve annual returns of 15-26%. For banks, this structure is expected to yield a spread benefit of approximately 60-65 basis points on FCNR-backed lending compared to regular wholesale deposits, creating a win-win scenario.
Concurrently, a separate facility offers concessional hedging for ECBs and overseas foreign currency borrowings until December 2026. This facility provides hedging at a flat 1.5% per annum, a substantial reduction from the prevailing market cost of 3.5-4%, offering banks a 200-250 basis point benefit on incremental overseas borrowing costs.
These measures are particularly relevant given the context of foreign institutional investors (FIIs) being net sellers of approximately $45 billion in Indian equities since the start of 2024, impacting holdings in large private lenders. Historical data from the 2013 swap window shows it attracted $27 billion in FCNR(B) deposits and $34 billion in total inflows, leading to a $12 billion increase in reserves and a 3.4% rupee appreciation within a year. Reserves continued to grow significantly in the subsequent three years.
While the current yield differential between US and Indian deposit rates is narrower than in 2013, the attractiveness of these measures remains, especially with the seasonally strong NRI remittance months of July and August approaching. The RBI projects combined inflows of $40-50 billion by FY27 from these initiatives.
For the banking sector, the immediate opportunity lies in efficiently converting these liquidity inflows into profitable book expansion. Institutions with strong international operations and disciplined deposit pricing are best positioned to leverage this liquidity tailwind for sustained margin gains. The anticipated improvement in systemic liquidity and currency stability could also help mitigate the FII selling pressure that has affected sector sentiment.