Whalesbook
Bank of Baroda has launched a new FCNR(B) deposit scheme for NRIs, offering up to 6% interest on five-year US dollar deposits. This move, aligned with RBI’s latest measures to boost foreign currency inflows, reflects a broader banking sector effort to secure liquidity. For investors, the key monitorable remains how these higher deposit costs affect the bank's profit margins in the coming quarters.
What Happened
Bank of Baroda (BoB) has introduced a revised Foreign Currency Non-Resident (FCNR-B) deposit scheme for Non-Resident Indians (NRIs). The bank is now offering interest rates of up to 6% on US dollar deposits with a five-year maturity. Rates for other major currencies have also been adjusted, with the British Pound Sterling and Australian Dollar fetching 4.75%, Canadian Dollar deposits at 5.15%, and Euro deposits at 3.75%. These rates are effective from June 11, 2026.
Understanding the FCNR(B) Scheme
An FCNR(B) account allows NRIs to hold deposits in foreign currencies rather than converting them into Indian Rupees. This protects the depositor from currency fluctuations. For the bank, it is a way to acquire stable, long-term foreign currency liquidity. Historically, banks have used these schemes to balance their foreign currency assets and liabilities. The current move by Bank of Baroda is part of a larger, coordinated push following recent signals from the Reserve Bank of India (RBI) to attract more foreign currency inflows into the Indian banking system.
The RBI Swap Facility
A crucial factor supporting these high interest rates is the RBI’s special swap facility. Typically, when a bank accepts foreign currency deposits, it must 'hedge' the currency risk—a process that costs money. Under the current RBI guidelines, the central bank is effectively covering or subsidizing these hedging costs for eligible deposits. This makes it financially viable for banks to offer higher interest rates to NRIs without suffering significant losses on the hedging side. Without this support, offering 6% on dollar deposits would likely be too expensive for many lenders.
Sector-Wide Trend
The banking sector is witnessing a race to capture NRI deposits. Bank of Baroda is not the only lender adjusting its rates; peers like HDFC Bank, Punjab National Bank, Central Bank of India, Karur Vysya Bank, and AU Small Finance Bank have also recently revised their FCNR(B) rates. This collective move highlights a strategic priority across the sector to boost dollar liquidity and support the stability of the Indian Rupee, especially as external sector data shows improvements in current account balances.
The Cost vs. Liquidity Balance
For investors, this development brings a two-sided view. On the positive side, it ensures the bank maintains healthy liquidity and strengthens its foreign exchange reserves, which is essential for banking stability. However, there is a cost implication. When banks increase the interest rate paid on deposits, their cost of funds rises. If the bank cannot generate a high enough return on the assets where it deploys these funds, it could put pressure on the Net Interest Margin (NIM), a key metric that measures the difference between interest earned and interest paid. Investors will be watching whether this high-interest-rate environment leads to margin compression in the upcoming quarters.
What Investors Should Monitor
Going forward, the primary monitorable is the bank's quarterly financial results, specifically focusing on the Net Interest Margin (NIM) and the overall cost of funds. Investors should also track any future updates from the RBI regarding the swap facility. If the regulatory support for hedging costs is eventually reduced or withdrawn, banks may be forced to either lower their deposit rates or absorb higher costs, which could further impact profitability. Finally, keeping an eye on the broader sector trend for deposit growth will help determine if this strategy is successfully converting into sustained business growth for the bank.