Whalesbook
Indian banks are struggling to attract FCNR(B) deposits despite the Reserve Bank of India’s offer to cover hedging costs until September 2026. While banks are offering competitive rates of 6% to 7.1%, US-based NRIs are finding it harder to save due to high inflation and job market uncertainty. This has caused a sharp drop in deposit growth to 2.9% in FY26. For banks, this trend creates challenges in deposit mobilization and liquidity planning.
What Happened
Indian banks have been aggressively trying to mobilize Foreign Currency Non-Resident (FCNR) deposits, which are essentially bank accounts held by NRIs in foreign currencies like the US Dollar. To encourage this, the Reserve Bank of India (RBI) decided to absorb the full hedging costs for these 3-to-5-year deposits until September 30, 2026. In response, banks have been offering attractive interest rates, ranging from 6% to 7.1%. Despite these incentives, the expected surge in funds has not materialized. Data shows that outstanding FCNR(B) deposit growth in US dollar terms slowed significantly to 2.9% in the 2025-26 fiscal year. This is a sharp decline compared to the 27.5% growth seen in 2024-25 and the 32.9% growth in 2023-24.
Why The Income Effect Matters More Than Rates
Banks often assume that higher interest rates are the primary driver for deposits. However, this ignores the financial reality of the Indian diaspora in the United States, which is the largest source of remittances to India, accounting for roughly 27.7% of total inflows. The core depositors are typically H1-B visa holders, green card holders, and professionals on training visas. These individuals are currently facing a dual challenge of high inflation in the US, which hovers around 5%, and a difficult job market. When the cost of living rises and job security becomes a concern, individuals tend to keep more money in liquid assets rather than locking it away in long-term fixed deposits. This is known as the income effect, where the ability to save is constrained by economic necessity, regardless of how attractive the bank's interest rate might be.
Challenges For Banks
Beyond the slowdown in deposit growth, banks are facing a more complex environment for managing their funds. The RBI has recently eased investment limits for NRIs and Overseas Citizens of India in equity instruments. This move creates competition for bank deposits, as some investors may choose to move their capital into the stock market rather than traditional savings accounts. Furthermore, banks must remain vigilant regarding regulatory requirements. Ensuring that all Know Your Customer (KYC) documentation is robust is essential to prevent misuse of accounts. Additionally, the slowdown in these deposits forces banks to re-evaluate their asset-liability management. Banks rely on stable, long-term foreign currency deposits to manage their liquidity ratios and prudential norms, and a decline in these inflows can put pressure on their ability to maintain these important financial buffers.
What Investors Should Track
Investors monitoring the banking sector should pay close attention to the growth trajectory of NRI deposits in upcoming quarterly results. The ability of banks to attract these funds is a key indicator of their liquidity health. It will be important to observe how banks adjust their interest rate strategies if the US economic environment remains challenging. Furthermore, any updates on RBI regulations regarding NRI investment limits will be relevant, as changes here could either help or further drain deposit pools. The overall trend of remittances and the employment situation for the Indian diaspora in the US remain critical external factors that will dictate the flow of these specific deposits, influencing the cost of funds and the margins for major Indian banks.
