For most of the past decade, non-resident Indians looking to park their dollar savings have had little reason to consider Indian banks over alternatives in the United States or other developed markets. Dollar deposits in overseas banks offered competitive returns, easy access to funds and familiarity. This week, however, the Reserve Bank of India has reopened a route that has historically been used only during periods of pressure on the country’s external finances, offering overseas Indians a chance to earn unusually high returns on dollar deposits held with Indian banks.
The move has attracted attention not only because of the rates being discussed, which could reach as high as 7 per cent or more depending on the bank, but also because of what it says about the wider economic environment. The RBI’s decision to create a special window for foreign currency deposits from non-resident Indians is widely viewed as an attempt to strengthen foreign exchange inflows at a time when pressure has been building on India’s external accounts.
The scheme centres on Foreign Currency Non-Resident Bank deposits, commonly known as FCNR(B) deposits. These accounts allow eligible non-resident Indians to deposit foreign currency directly with Indian banks and receive both principal and interest back in the same currency when the deposit matures. Unlike many other overseas investment routes linked to India, depositors are not exposed to movements in the rupee because the funds remain denominated in foreign currency throughout the deposit period.
The latest window will remain open until September 30, giving banks several months to attract fresh foreign currency deposits from overseas Indians. While the RBI is not directly setting deposit rates, it has altered the economics of these products in a way that allows banks to offer considerably higher returns than they normally would.
Why the RBI Has Brought Back a Familiar Crisis-Era Playbook
The last time India introduced a similar arrangement was in 2013. At that time, concerns over capital outflows and pressure on the rupee prompted then RBI Governor Raghuram Rajan to launch a programme aimed at attracting overseas Indian savings. That initiative brought in billions of dollars within a relatively short period and became one of the most successful foreign currency mobilisation efforts undertaken by the central bank.
The circumstances today are different, but some of the underlying concerns are similar. Higher energy prices, volatility in currency markets and slower foreign currency inflows have contributed to fresh attention on India’s foreign exchange position. Foreign exchange reserves remain substantial by historical standards, yet policymakers have been watching recent declines closely.
According to recent estimates, India’s reserves have fallen from their earlier highs this year. At the same time, inflows through NRI foreign currency deposits have weakened sharply compared with previous years. For policymakers seeking stable sources of foreign currency, the overseas Indian community remains an obvious target.
The RBI’s latest step addresses one of the main reasons banks have historically struggled to offer attractive rates on FCNR(B) deposits. Normally, banks raising dollar deposits must hedge currency risks when those funds are used within India. That hedging process carries a cost that reduces the interest rates banks can pay depositors.
Under the current arrangement, the RBI is offering banks a special swap facility that removes much of that burden. Banks can exchange foreign currency inflows with the central bank under favourable terms and avoid the usual hedging expense. The savings can then be passed on to depositors through higher interest rates.
Market participants estimate that this support could increase deposit rates by between 1.5 and 2 percentage points compared with standard FCNR(B) offerings. While banks will ultimately determine their own rates, expectations have centred on returns ranging from around 5.5 per cent to 7 per cent annually for US dollar deposits.
The attraction is straightforward. Many overseas Indians currently hold dollar savings in products offering lower returns. A materially higher yield, combined with tax benefits available in India, may encourage some depositors to move funds into Indian banks.
Attractive Rates Come With Conditions Investors Must Understand
Despite the attention surrounding the headline rates, the scheme comes with conditions that depositors will need to examine carefully before committing funds.
One of the most important considerations is the deposit tenure. The special window applies primarily to deposits with maturities ranging from three to five years. Although some withdrawals may be permitted after a minimum holding period, access to funds is more restricted than many short-term savings products available in overseas markets.
The rates themselves are also not guaranteed by the RBI. Individual banks will decide what they are willing to offer based on their own funding needs and commercial calculations. While some institutions have already indicated rates approaching the upper end of expectations, others may choose more conservative pricing.
Another issue concerns deposit protection. India operates a deposit insurance scheme through the Deposit Insurance and Credit Guarantee Corporation, but the coverage limit remains relatively modest compared with the size of many foreign currency deposits. For larger amounts, depositors are effectively relying on the financial strength of the bank itself rather than insurance protection.
This reality is likely to focus attention on larger public sector lenders and major private banks, which traditionally attract the bulk of FCNR(B) deposits. Institutions such as State Bank of India, HDFC Bank, ICICI Bank and Bank of Baroda are expected to play a prominent role in attracting overseas funds during the window period.
The programme also forms part of a wider package of measures announced by Indian authorities in recent days. Alongside the FCNR(B) initiative, policymakers have introduced changes intended to make government bonds more attractive to overseas investors and widen access to Indian financial markets. Together, these steps point to a broader effort to attract foreign currency at a time when competition for international capital has become more intense.
