RBI to bear hedging costs for banks’ foreign currency deposits, flows of over $10 bn seen

Mumbai: Amid significant depreciation in the domestic currency, the Reserve Bank of India on Friday said it will absorb the hedging cost for foreign currency deposits mobilized by Indian banks till 30 September 2026. The move aims to encourage the flow of foreign currency deposits into the country.

“A similar facility for bearing the full hedging cost shall be provided till 30th September 2026 to AD (authorized dealer) banks for raising fresh 3-5-year FCNR (B) [foreign currency non-resident (bank)] deposits,” Governor Sanjay Malhotra said in his monetary policy statement.

The measure should be a “game-changer” as it would help attract foreign currency flows while allowing banks to bolster their deposit growth and meet client funding requirements, said P.D. Singh, chief executive officer, India & South Asia, Standard Chartered Bank.

“I think there will be a lot more new money because there is a clear 3% advantage which is being given. The one-year rupee forward is 3% today, and the overall hedging cost is 3.0-3.2%,” State Bank of India managing director Ashwini Kumar Tewari told CNBC-TV18.

If banks pass on this advantage to customers, it should result in a lot of new money coming in, he said, adding that SBI will go “all out” to market these schemes and reach out to its non-resident Indian (NRI) customers in West Asia, the US and in the European countries. While the final inflows will depend on customer appetite, Tewari pegged foreign flows through this route at upwards of $10 billion for the banking system as a whole.

At the post-policy conference, the central bank chief said these deposits will also “certainly” be exempt from cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements as per existing regulations. “In terms of the quantum, we are hopeful of reasonable (flows). We are not targeting any particular amount, but we do expect healthy flows,” Malhotra said.

Typically, FCNR (B) deposits are included in a bank’s net demand and time liabilities (NDTL) for computing CRR and SLR, but RBI periodically exempts certain incremental deposits from these reserve requirements to manage forex inflows and support the rupee.

On Friday, the Indian rupee opened at 95.73 against the US dollar but quickly rose to 95.40 after the governor’s comments. On Thursday, it had closed at 95.79. Since the US-Iran war began on 28 February 2026, the rupee has depreciated over 5% and hit a record low of 96.83 on 20 May. In FY26, the currency had plummeted over 11%, according to Bloomberg data.

Malhotra is optimistic that the move will be well-accepted by banks as it will also alleviate the issue of slower deposit mobilization. Credit growth has been persistently outpacing deposit growth over the past three years. System-level bank credit grew 16.1% to ₹214 trillion in the fiscal year 2026, whereas deposits rose 13.5% to ₹262 trillion, as per RBI data. Latest figures show that bank credit grew 16.1% year-on-year in the fortnight ended 15 May 2026, significantly higher than the deposit growth of 12.2%.

“This will enable banks to increase deposit rates for NRIs and OCI (overseas citizens of India) depositors,” Malhotra said, adding that the hedging benefit will allow for this to be possible despite the reduced interest rate differential between India and other countries.

The final guidelines on the deposit scheme will be issued shortly, as the central bank is still working out the final contours, he added.

As per SBI’s research report Ecowrap, longer maturities for FCNR (B) deposits reduce rollover risk and enhance stability of such funds. “With the RBI shouldering the hedging costs (@2.5% annually for the contract period), a successful deposit garner should largely alleviate constraints faced on domestic deposit mobilization front too,” group chief economic adviser Soumya Kanti Ghosh said in the report, adding this should also have a “sobering effect” on loan pricing and marker-based yields.

“Placement of dollar deposits in the past was proving problematic because it capped the rate we could offer NRIs who wanted to move money into India and leave it in dollar terms. Assuming that this programme is attractive, that this will enable us to increase the rates and also get longer duration money, which will be helpful,” a senior official at a small private sector bank told Mint.

Since the depositors and banks will not be carrying any currency risk, they might be encouraged to move more dollars to India, the official said, adding that it could significantly contribute to dollar inflows.

The current FCNR (B) rate is around 3.35% for three-year deposits, the cost of hedging a forward premium is 3.5%, and the current card rate is 6.5%., as per the SBI report. “Banks can thus offer attractive FCNR (B) pricing in the range of 5.5% and upwards (US treasury rates at 4% of equivalent duration),” SBI’s Ghosh said, pegging FCNR (B) flows at higher than the $34 billion mobilized in 2013.

RBI had last introduced a FCNR deposit scheme during the ‘taper tantrum’ of 2013, when it allowed banks to swap FCNR deposits into rupees at a highly subsidized rate. The scheme had then brought in over $20 billion of foreign flows, giving non-resident Indians attractive tax-free returns and helping stabilize the domestic currency.