RBI Moves to Offset Hedging Costs for Banks, Aims to Attract Foreign Currency Remittances

Reserve Bank of India Introduces New Measure to Attract Dollar Inflows

The Reserve Bank of India (RBI) has announced a new initiative to bring in dollars into the country. The central bank will bear the full hedging cost on fresh Foreign Currency Non-Resident Bank deposits, also known as FCNR(B) deposits, mobilized by banks till September 30, 2026. This move is part of a broader RBI package aimed at attracting foreign currency inflows and supporting the rupee, which has been under pressure due to high crude oil prices and foreign outflows.

FCNR(B) deposits are a type of fixed deposit that non-resident Indians can hold in foreign currency with Indian banks. Unlike normal NRE or NRO deposits, which are maintained in rupees, FCNR(B) deposits are held in currencies such as the US dollar, pound, euro, yen, Canadian dollar, or Australian dollar. These deposits offer a way for NRIs to keep their money in foreign currency while earning interest from an Indian bank, without carrying rupee depreciation risk.

The RBI's move is aimed at encouraging banks to raise foreign currency deposits at a lower effective cost. By bearing the hedging cost, the central bank is removing a significant burden for banks, which typically need to protect themselves from currency movements through hedging. This protection comes at a cost, and when the cost is high, banks may find it less attractive to raise foreign currency deposits aggressively.

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The RBI's support will make the scheme more attractive for banks, which can raise foreign currency funds more competitively. This could encourage banks to offer more competitive rates to NRIs and mobilize more deposits before the September 30 deadline. For NRIs, FCNR(B) deposits offer a way to keep money in foreign currency while earning interest from an Indian bank, without carrying rupee depreciation risk.

The RBI's move is one part of a larger strategy to attract dollar inflows and support the rupee. The central bank has reported that the rupee strengthened after RBI's broader measures, moving from 95.67 to 95.2450 against the US dollar. While FCNR(B) deposits alone cannot fix rupee weakness, they can add another source of dollar supply.

India has used FCNR(B) deposits in earlier periods when the country needed to attract foreign currency inflows. A major example came in 2013, when India faced pressure during the "taper tantrum" period. RBI then offered a special swap window to banks for FCNR(B) deposits of maturity above three years, helping attract dollar inflows.

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Note: The table shows the rupee value against the US dollar in 2013 and 2026.