Indian Banks Cut FCNR Deposit Rates by Up to 310 Basis Points After RBI Window Closes

Indian Banks Cut FCNR Deposit Rates by Up to 310 Basis Points After RBI Special Fundraising Window Closes

Indian banks have sharply reduced interest rates on longer-tenure Foreign Currency Non-Resident Bank deposits after the Reserve Bank of India's special fundraising facility ended, unwinding the exceptional returns offered to overseas depositors during the previous three months.

Major lenders including HDFC Bank, ICICI Bank, State Bank of India, Punjab National Bank, Axis Bank and Kotak Mahindra Bank have reset rates on three-to-five-year FCNR(B) deposits from September 1.

At some banks, reductions have reached as much as:

310 basis points.

HDFC Bank, for example, has cut its five-year US-dollar FCNR(B) rate from 6.25% to 3.15%, while other lenders have made similarly large reductions across longer maturities.

The move follows the August 31 closure of the RBI-supported facility that had significantly improved the economics of raising long-term foreign-currency deposits.

The special framework helped banks mobilise tens of billions of dollars from non-resident Indians, contributing to a sharp rise in foreign-exchange inflows and strengthening India's external liquidity buffer.

With that incentive now withdrawn, banks are rapidly returning FCNR(B) pricing toward more normal market levels.

HDFC Bank Cuts Five-Year FCNR Rate by 310 Basis Points

Among the most significant rate changes is HDFC Bank's revision.

The private-sector lender has reduced its five-year US-dollar FCNR(B) deposit rate to:

3.15%.

Before the special facility ended, the corresponding rate was:

6.25%.

That represents a reduction of:

310 basis points.

The revised rate became effective from September 1.

The size of the adjustment illustrates how heavily long-duration FCNR pricing had been influenced by the RBI-supported fundraising framework.

ICICI Bank Also Makes Sharp Rate Reduction

ICICI Bank has similarly reduced its longer-tenure US-dollar deposit rates.

During the special fundraising period, the bank had substantially increased rates on three-to-five-year FCNR(B) deposits to attract overseas money.

Following the closure of the RBI window, those rates have been lowered sharply toward conventional levels.

The reset is particularly visible in the five-year maturity, where the difference between promotional and post-window pricing is around three percentage points.

That means an NRI placing a new long-duration dollar deposit in September will receive materially lower returns than were available during the special mobilisation period.

SBI Ends Advantage FCNR(B) Premium

State Bank of India also offered unusually attractive rates during the RBI programme.

Under its Advantage FCNR(B) offering, SBI had offered approximately:

5.75% on five-year deposits of up to $1 million

and as much as:

6% for larger deposits.

Its regular five-year FCNR(B) rate after the programme has moved back to around:

3.05%.

That implies a reduction of approximately:

270 to 295 basis points

depending on deposit size.

As India's largest bank, SBI's rate reset provides another strong indication that the exceptional pricing environment has ended.

Punjab National Bank Cuts Five-Year Rate From 6.50%

Public-sector lender Punjab National Bank has also sharply reduced its FCNR(B) pricing.

PNB had previously offered as much as:

6.50%

on certain five-year US-dollar deposits below $1 million.

Its revised five-year rate from September 1 is around:

3.06%.

The change represents an even larger absolute reset from the promotional level, although exact comparisons depend on deposit category and applicable period.

PNB has also reduced rates on deposits with maturities between three and four years.

Axis Bank Resets Three-to-Five-Year Rates

Axis Bank has also returned its longer-duration FCNR(B) rates to substantially lower levels.

The lender had previously offered approximately:

6.25%

on three-to-five-year deposits during the special window.

Its revised rates include approximately:

3.25% for three-to-four-year deposits

and:

2.95% for four-to-five-year deposits

for deposits below $1 million.

The difference again demonstrates the scale of the premium banks were willing to pay while the special RBI mechanism remained available.

Kotak Mahindra Bank Also Lowers Rates

Kotak Mahindra Bank has made similar adjustments.

Its revised FCNR(B) rates from September 1 include approximately:

3.40% for three-to-less-than-four-year deposits,

3.20% for four-to-less-than-five-year deposits,

and:

3% for five-year deposits.

Earlier, Kotak had offered rates of more than 6% on certain long-tenure deposits during the special mobilisation period.

The consistency of the reductions across public and private banks shows that the rate reset is an industry-wide response rather than an institution-specific decision.

Why Banks Had Raised FCNR Rates So Aggressively

The unusually high rates were linked to an RBI initiative introduced in June 2026.

The central bank created a special dollar-rupee swap arrangement designed to make it cheaper for banks to mobilise foreign-currency deposits from overseas Indians.

Ordinarily, a bank raising dollar deposits must account for the cost of converting and hedging those funds against exchange-rate movements.

Those hedging costs can make it expensive to offer high deposit rates.

Under the special framework, the economics changed significantly.

Banks could mobilise long-term foreign currency at a more attractive effective cost.

That allowed them to pass part of the benefit to depositors through substantially higher interest rates.

Special Window Became Effective in June

Banks began aggressively raising FCNR(B) rates after the facility became operational in early June.

Competition intensified quickly.

Several lenders pushed rates on three-to-five-year dollar deposits toward:

6% or more.

For overseas Indians, those returns were unusually attractive for relatively low-risk foreign-currency bank deposits.

The result was a rapid inflow of dollar deposits into India's banking system.

FCNR(B) Deposits Attracted More Than $65 Billion

The scheme generated an exceptional response.

Indian banks had mobilised approximately:

$65.4 billion

through FCNR(B) deposits by August 21.

Broader foreign-currency inflows under the RBI-supported facilities, including overseas borrowings, had reached approximately:

$73 billion.

That scale of mobilisation exceeded the expectations of many market participants.

It also demonstrated the ability of Indian banks to attract substantial overseas liquidity when deposit pricing becomes sufficiently competitive.

RBI Closed Window Earlier Than Originally Planned

The strength of the inflows allowed the special FCNR(B) facility to be closed earlier than initially scheduled.

The window had originally been expected to remain available until:

September 30, 2026.

Instead, the deadline was advanced to:

August 31.

The early closure reflected the success of the programme in attracting foreign currency.

Once the desired external liquidity had been accumulated, there was less need to continue providing unusually favourable hedging terms.

India’s Forex Reserves Benefited From Inflows

The programme also contributed to a substantial increase in India's foreign-exchange reserves.

India's reserves reached a record of approximately:

$729.3 billion

by August 21.

The increase was supported in significant part by foreign-currency inflows generated through the RBI's June measures.

A larger reserve buffer strengthens the central bank's ability to manage periods of:

currency volatility,

capital outflows,

higher oil prices,

and global financial stress.

That has become particularly relevant as the rupee faces pressure from elevated crude prices and global interest rates.

NRI Deposits Became Important Source of Dollar Supply

FCNR(B) deposits are particularly useful because they bring foreign currency directly into the banking system.

Unlike rupee-denominated NRE deposits, FCNR(B) accounts are maintained in foreign currencies.

Supported currencies can include major currencies such as:

US dollars,

pounds sterling,

euros,

Japanese yen,

Canadian dollars,

and Australian dollars.

This means banks receive foreign currency without immediately exposing depositors to rupee exchange-rate movements.

What Is an FCNR(B) Deposit?

An FCNR(B) account allows eligible non-resident Indians to place term deposits with Indian banks in designated foreign currencies.

The principal and interest are maintained in the chosen foreign currency.

This provides an important benefit:

the depositor does not take direct rupee currency risk.

If an NRI deposits dollars and later withdraws dollars, movements in the rupee-dollar exchange rate do not alter the foreign-currency value of the deposit.

This distinguishes FCNR(B) deposits from rupee-denominated NRI accounts.

FCNR(B) Deposits Appeal to Overseas Indians

These deposits can be attractive to NRIs seeking:

capital preservation,

bank deposit returns,

easy repatriation,

and protection from rupee depreciation.

Interest earned on qualifying FCNR(B) deposits is also generally tax-exempt in India for eligible non-resident account holders, subject to applicable rules and individual circumstances.

However, returns depend heavily on:

currency,

deposit tenure,

bank,

and prevailing international interest rates.

The exceptional 2026 promotional rates were therefore not representative of normal FCNR pricing.

Long-Tenure Rates Were Most Affected

The largest rate reductions have occurred on deposits with maturities of:

three to five years.

This is not accidental.

Those were the maturities most strongly supported by the special fundraising structure.

Banks therefore concentrated their most aggressive promotional pricing in this part of the maturity curve.

Once the facility ended, there was little economic reason to maintain those elevated rates.

Shorter-tenure deposit pricing has generally been much more stable.

Shorter-Term Rates Show Smaller Changes

The relatively modest adjustment in shorter maturities suggests that the broader FCNR market has not experienced a uniform collapse in deposit pricing.

Instead, the changes are concentrated where special incentives had distorted normal pricing.

One-year and shorter-duration rates continue to be influenced primarily by:

global interest rates,

currency-specific money markets,

and banks' funding requirements.

That distinction is important for depositors comparing current rates with those available during the special programme.

Banks No Longer Need to Pay Exceptional Premium

The rate reset also reflects a straightforward funding decision.

Banks paid unusually high interest because the RBI framework lowered the effective cost of mobilising the funds.

Without that advantage, maintaining 6%-plus dollar deposit rates would be expensive.

Banks would have to absorb a much larger funding cost relative to:

international wholesale markets,

domestic deposits,

and alternative sources of liquidity.

The rapid reduction therefore reflects rational balance-sheet management.

Strong Inflows Have Already Improved Funding Conditions

Banks also enter the post-window period with a significant stock of deposits already mobilised.

The $65-billion-plus FCNR inflow provides long-duration foreign-currency funding that remains on bank balance sheets until those deposits mature or are withdrawn according to applicable terms.

This reduces the immediate need to continue aggressively competing for fresh foreign currency.

Banks can therefore allow new-deposit pricing to return to more sustainable levels.

Funding Liquidity Remains Comfortable

The foreign-currency inflows also contributed indirectly to broader domestic liquidity conditions.

When banks swap foreign currency with the RBI, rupee liquidity can enter the banking system.

This has helped create substantial excess liquidity.

Indian banking-system liquidity climbed to multiyear highs during the mobilisation period.

That reduces the urgency for banks to attract additional deposits at unusually high rates.

RBI May Need to Absorb Excess Liquidity

While the FCNR programme strengthened foreign-exchange reserves, it also created a separate monetary-policy challenge.

Large foreign inflows can add rupee liquidity to the banking system.

Too much surplus liquidity can push overnight interest rates below the policy rate and weaken monetary transmission.

The RBI has therefore been using liquidity-management instruments such as:

variable rate reverse repo operations

to absorb excess funds.

Future liquidity management will become particularly important if inflationary pressures remain elevated.

Strong FCNR Inflows Help RBI Support Rupee

The reserve accumulation generated by the scheme also gives the RBI more capacity to intervene in the currency market.

The rupee has experienced pressure in 2026 from:

high crude-oil prices,

elevated US Treasury yields,

foreign portfolio outflows,

and global geopolitical uncertainty.

A larger reserve stock allows the central bank to sell dollars when necessary to smooth excessive volatility.

The FCNR mobilisation programme therefore served both banking-system and external-stability objectives.

RBI Intervention Has Supported Rupee

The central bank has recently stepped up dollar sales as the rupee trades near historically weak levels against the US currency.

A stronger reserve position provides additional flexibility for those interventions.

However, foreign-exchange reserves are not intended to defend a permanently fixed exchange rate.

The RBI generally uses intervention to manage disorderly movements and excessive volatility rather than guaranteeing a particular rupee level.

The additional FCNR-generated reserves strengthen that ability.

Deposit Mobilisation Could Moderate From September

With interest rates returning toward 3% on many longer-tenure dollar deposits, new FCNR inflows are likely to slow from the extraordinary pace seen during the promotional period.

This does not mean inflows will stop.

NRIs continue to use FCNR accounts for reasons beyond headline interest rates.

However, the gap between Indian FCNR deposit returns and alternative dollar investments has narrowed substantially.

That reduces the incentive to move large amounts of capital solely to capture exceptional deposit yields.

NRIs Now Face Different Return Calculation

During the special window, a 6%-plus dollar deposit could compare favourably with many conventional international savings products.

At rates near 3%, the comparison changes.

Depositors may evaluate FCNR returns against:

US Treasury yields,

international bank deposits,

money-market products,

and other low-risk instruments.

The relative attractiveness of Indian FCNR deposits will therefore depend increasingly on conventional market factors rather than regulatory incentives.

Existing Deposits Keep Their Contracted Rates

The rate reductions generally apply to:

new deposits and renewals

from the effective date of the revised schedules.

An FCNR(B) deposit already booked at a fixed promotional rate typically retains the contracted interest rate for its agreed maturity, subject to the applicable deposit terms.

That means customers who locked in higher rates during the special window remain significant beneficiaries of the programme.

They could continue earning those rates for several years depending on the original maturity selected.

Early Withdrawal Could Reduce Benefits

Depositors considering premature withdrawal should examine bank-specific terms carefully.

FCNR deposits can have:

minimum holding requirements,

reduced interest on premature closure,

or other conditions.

A depositor who secured a high promotional rate may therefore sacrifice a valuable return advantage by exiting early.

With current rates substantially lower, replacing the original deposit at equivalent terms may no longer be possible.

Banks Could See Margin Benefits From Lower New Rates

The post-window rate reset could also help banks protect future interest margins.

Deposit rates represent a funding cost.

If banks continued paying 6% on new long-duration dollar liabilities without the subsidised swap economics, margins could come under pressure.

Reducing rates to market-based levels ensures that newly raised deposits are more closely aligned with the economics of lending, investing and hedging those funds.

This should make incremental FCNR funding more sustainable.

Existing High-Cost Deposits Remain on Balance Sheets

However, banks still carry deposits raised during the promotional period.

Those liabilities continue to pay their contracted rates until maturity.

Banks benefited from favourable swap economics when those deposits were raised, reducing the effective cost.

Nevertheless, the large stock of deposits will remain an important element of bank funding structures over the coming years.

Banks will need to manage the maturity profile carefully as these deposits eventually come due.

Maturity Concentration Will Need Monitoring

Because much of the promotional activity focused on three-to-five-year deposits, a significant volume could mature within a relatively concentrated period several years from now.

Banks will need to plan for:

renewals,

repayment,

replacement funding,

and foreign-exchange management.

This is a normal treasury function, but the unusually large size of the 2026 mobilisation makes future maturity management more important.

Regulators are also likely to monitor the profile.

FCNR Programme Demonstrates Power of NRI Funding Base

One broader lesson from the episode is the scale of India's overseas Indian savings pool.

When banks offered competitive rates and the RBI reduced hedging costs, tens of billions of dollars were mobilised in a matter of weeks.

That gives policymakers another potential tool during periods of external pressure.

India has previously used NRI deposits and special banking schemes to strengthen foreign-currency liquidity during periods of market stress.

The 2026 programme again demonstrated the effectiveness of that channel.

Special Windows Are Not Permanent Deposit Policy

The sharp fall in rates also demonstrates why depositors should distinguish between:

temporary policy-driven offers

and

normal market pricing.

The 6%-plus rates offered during the summer were supported by exceptional regulatory economics.

They were never likely to become a permanent feature of the FCNR market.

Once the special facility achieved its objectives, rates naturally returned toward levels determined by international funding costs.

Banks Could Raise Rates Again If Funding Needs Change

The current reductions do not mean FCNR rates will remain fixed.

Banks can revise deposit pricing according to:

global interest rates,

currency markets,

funding requirements,

competitive conditions,

and regulatory limits.

If dollar funding becomes more valuable in the future, rates could rise again.

Similarly, cuts in global interest rates could pull them lower.

The September reset is therefore a normalisation rather than a permanent endpoint.

RBI’s Strategy Achieved Large Foreign-Currency Mobilisation

From a policy perspective, the special fundraising window appears to have achieved its immediate objective.

It encouraged banks to attract a very large volume of foreign-currency deposits and overseas funds.

That supported:

foreign-exchange reserves,

bank funding,

rupee stability,

and external liquidity.

The early closure itself is evidence of how quickly the scheme attracted capital.

The challenge now shifts from mobilisation to managing the liquidity created by those inflows.

Conclusion

Indian banks' decision to cut FCNR(B) deposit rates by as much as 310 basis points marks the end of an extraordinary period in which RBI-supported economics allowed lenders to offer unusually high returns on long-term foreign-currency deposits.

HDFC Bank has reduced its five-year US-dollar rate from 6.25% to 3.15%, while ICICI Bank, SBI, PNB, Axis Bank and Kotak Mahindra Bank have also sharply reset longer-tenure rates from September 1.

The changes follow the August 31 closure of the RBI's special fundraising window, which had initially been scheduled to remain available until the end of September.

During the programme, banks mobilised around $65.4 billion through FCNR(B) deposits by August 21, while total foreign-currency inflows under related RBI facilities reached about $73 billion.

The exceptional inflows helped lift India's foreign-exchange reserves to record levels and strengthened the RBI's ability to manage pressure on the rupee.

For NRIs, however, the economics of fresh FCNR deposits have now changed substantially.

The unusually attractive 6%-plus rates available during the special window have largely disappeared, with many longer-tenure rates returning toward the 3% range.

The episode demonstrates both the power of India's overseas depositor base and the speed with which bank funding conditions can change once temporary policy incentives are removed.