Banks sharply upped interest rates on FCNR (B) USD deposits recently in the 3–5-year tenor

Banks may face a tricky situation in their bid to attract fresh Foreign Currency Non-Resident (Bank) deposits under the Reserve Bank of India’s recent measures to attract foreign capital.

Depositors with existing Foreign Currency Non-Resident (Bank)/ FCNR (B) deposits denominated in US Dollars may prematurely close them and roll-over the proceeds into fresh deposits to benefit from higher interest rates that banks are currently offering for a limited period, according to bankers.

Simply put, the lure of higher interest rates on fresh 3–5-year FCNR (B) deposits may prompt Non-Resident Indians (NRIs) to settle for lower interest rate for the period of an existing deposit has run, prematurely close it and transfer the proceeds into a new longer-term FCNR (B) deposit to earn better returns.

Banks sharply upped interest rates on FCNR (B) USD deposits recently in the 3-5 year tenor. The interest rates have been increased to 6-7 per cent thereabouts, from the earlier 3 per cent odd levels.

This comes in the wake of RBI’s announcement, as part of its June 5^th measures to attract dollars to stabilise the rupee. The RBI announced that it will bear the full hedging cost on fresh 3–5-year FCNR (B) deposits that banks mobilise up to 30^th September 2026. Moreover, such deposits have been exempted from statutory pre-emptions such as the cash reserve ratio and statutory liquidity ratio.

Within the overall non-resident deposits of banks, the outstanding under FCNR (B) deposits category nudged up about 3 per cent year-on-year to stood at $33.756 billion as at March-end 2026 against $32.809 billion as at March-end 2025, as per the RBI data. Inflows into these deposits were sharply lower at $946 million in FY26 against $7.076 billion in FY25.

“About 30 per cent of the existing FCNR (B) deposits may be prematurely closed and rolled over into fresh deposits. It is unclear if RBI will bear the hedging cost of such rolled over deposits. If it does not, then banks will have to pick up the tab. Banks simply cannot afford to lose existing depositors to competition,” said a senior banker from a private sector bank.

Banking expert V Viswanathan observed that the RBI’s hedging support for banks will not only bring in fresh FCNR (B) deposits but will also lead to renewal of existing deposits maturing before 30^th September 2026. It had also resulted in premature closure of existing deposits (of 1-5 year tenor) to avail themselves of the present higher interest rates for 3–5-year tenor.

As per RBI directions, no interest is payable on a FCNR (B) deposit if it is closed before one year.

FCNR (B) Deposit

“In case a deposit is sought to be prematurely closed after it has run beyond the one-year period, banks usually pay the interest rate applicable for the period the deposit has run (instead of the contracted rate). There could also be a penalty (of up to one per cent in the case of some banks),” Viswanathan said.

So, in the aforementioned scenario, except for deposits which have not completed one year before the RBI’s 30^th September 2026 deadline, there is a likelihood of other deposits being prematurely closed and moving into the new 3–5-year FCNR (B) deposits.

“The reason is simple. The 200-300 plus basis points increase in interest rates now will more than compensate any loss of interest due to premature closure. The same tilt is expected in the existing 3-5 year tenor deposits, provided there is no premature penalty clause,” the expert said.

FCNR (B) deposits can be opened by Non-Resident Indians (NRIs) for a minimum and maximum tenor of one year and five years, respectively. They can be opened in six currencies: Pound Sterling, US Dollar, Euro, Japanese Yen, Canadian Dollar, and Australian Dollar. Interest income from these deposits is exempt under Income Tax rules. Funds from these accounts are fully repatriable in foreign currencies.

SBI economists expect around $40-45 billion to come in through the FCNR (B) deposits route.

Published on June 15, 2026