The Reserve Bank of India has introduced new measures for Foreign Currency Non-resident deposits to increase dollar inflows. By absorbing hedging costs and permitting leverage, the central bank aims to strengthen foreign exchange reserves, which have declined to approximately $682 billion by mid-2026.
Detailed Coverage
The Reserve Bank of India (RBI) is actively working to increase the inflow of foreign currency into the country through new incentives for Non-Resident Indian (NRI) depositors. These measures, rolled out between June and late July 2026, are designed to boost the Foreign Currency (Non-resident) Account (Banks) Scheme, commonly known as FCNR(B).
These policy changes come at a time when India’s foreign exchange reserves have faced downward pressure, retreating from a peak of $728 billion in February 2026 to around $682 billion by mid-year. The initiative specifically targets the accumulation of U.S. dollars within the domestic banking system.
Impact of Hedging Cost Absorption
In early June, the RBI began absorbing currency hedging costs, which typically range between 3% and 3.5% annually. Previously, these costs were borne by the depositors or the banks. By removing this burden, the central bank has enabled banks to offer higher interest rates on these deposits. Reports indicate that rates for some FCNR(B) deposits have climbed to 7.1%, compared to levels below 4% earlier in the year. Institutions such as State Bank of India, Canara Bank, and AU Small Finance Bank have adjusted their offerings in response to these regulatory changes. Furthermore, the RBI has exempted banks from maintaining the usual Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on these specific deposits, providing banks with more liquidity to deploy.
Leverage and Offshore Borrowing
Following the initial move, the RBI introduced a leverage facility on June 23, allowing banks to offer loans or standby letters of credit (SBLCs) against FCNR(B) deposits. This structure allows NRI depositors to use their deposits as collateral for offshore loans. While this can significantly increase the effective return on the initial capital, it also introduces a higher degree of complexity for the depositor. It is important to note that the benefit of this leverage is influenced by the prevailing cost of offshore borrowing, which has trended upward recently, potentially impacting the final net return for the depositor.
Unlike Non-Resident External (NRE) accounts, which are maintained in rupees and carry currency fluctuation risks, FCNR(B) deposits remain denominated in foreign currency. This structure insulates the depositor from exchange rate volatility, as the principal and interest are returned in the original foreign currency.
The current window for these enhanced deposit rates is scheduled to close on September 30, with the associated currency swap facility available until October 16. Investors and depositors may monitor how quickly banks continue to mobilize these funds and whether these measures effectively stabilize or grow the foreign exchange reserves as the specified deadlines approach.