RBI Frees FCNR-B Rules, Letting Banks Lend Against NRI Deposits

The Reserve Bank of India on June 23 cleared a series of operational questions from banks on its FCNR-B deposit scheme, a clarification that lets Indian lenders extend loans against these dollar deposits, issue standby letters of credit (SBLC) to overseas lenders, and run shorter-tenor swaps with the central bank, all in service of pulling non-resident Indian (NRI) dollars into the country. The rupee ended at Rs 94.73 per dollar on the day, against Rs 94.69 in the previous session, and the document is meant to remove the last operational frictions keeping banks from competing for the deposits.

The clarification is the second lever being pulled on the foreign currency non-resident bank (FCNR-B) scheme, expanding the toolkit beyond the hedging cost absorption announced on June 5. Where the original June 5 policy subsidised the banks’ cost of hedging, the June 23 note lets them use the deposits as collateral and run flexible swaps, opening the door to structures where NRIs borrow overseas and park funds in India. Several public and private sector banks, including Yes Bank, Canara Bank, South Indian Bank, and AU Small Finance Bank, have already raised FCNR-B deposit rates to 7.1 percent.

Four Operational Permissions in the June 23 Note

The document, first reported by Moneycontrol, was issued as a written response to a series of bank queries raised after the original June 5 policy was operationalised on June 8. The RBI’s June 23 FCNR-B clarifications address four operational questions that had been holding banks back from fully mobilising deposits under the scheme. Where the June 5 package subsidised the hedging cost that had been eating into FCNR-B economics, the note lays out the practical mechanics for banks to use the deposits as collateral and run flexible swap structures.

Under the clarification, banks can now do four things that were previously unclear. They can extend loans to non-residents against FCNR-B deposits, including through their overseas branches. They can issue SBLC in favour of overseas lenders, allowing NRIs to use their Indian deposits as backing for foreign currency borrowings. They can lend directly to FCNR-B account holders and mark a lien on those deposits. And they can run swaps with the RBI for tenors under three years, with the swap covering only the principal amount and not the interest component, provided the underlying fresh deposit carries a minimum original three-year tenor.

• Extend loans to non-residents against FCNR-B deposits, including from overseas branches
• Issue SBLC in favour of overseas lenders, backed by the deposit
• Lend directly to FCNR-B account holders and mark a lien on the deposit
• Run RBI swaps for tenors under three years, with the swap covering only principal, not interest, on fresh deposits of at least three years

Why Banks Needed the Answer

The June 5 monetary policy announcement, followed by an operational circular on June 8, set out the broad strokes of the FCNR-B swap window but left several practical questions unanswered. Banks needed to know whether they could lend against the deposits, whether they could use them as collateral for SBLC issuance, and how short-tenor swaps would work. Without those answers, several lenders had been sitting on the sidelines, uncertain whether the structures their NRI clients wanted would run afoul of RBI rules.

The original June 5 package was the centrepiece of a five-measure RBI effort to defend the rupee, announced alongside a rate hold at 5.25 percent. MUFG Research estimated at the time that the combined package could draw around $40 billion in foreign currency flows, with the FCNR-B route alone pencilled in at a base case of $20 billion. Brokerages quoted by the Economic Times later put the figure higher, at $50-55 billion, exceeding the $34 billion the central bank pulled in under a similar programme in 2013. The June 23 document is the central bank’s written response to those questions.

The questions from banks centred on operational edges, not on the policy’s underlying economics. Each answered point in the note removes a structural reason an NRI or a bank might otherwise not be able to use the scheme.

How a Borrowed-Dollar NRI Deposit Now Works

The most consequential of the four points is the permission for banks to issue SBLC in favour of overseas lenders and to lend directly against FCNR-B deposits. Together, these open the door to borrowed-dollar structures where NRIs borrow dollars overseas at one rate and deposit them in India at a higher FCNR-B rate, pocketing the difference. With FCNR-B rates now between 6 percent and 7.1 percent and overseas borrowing costs linked to the secured overnight financing rate (SOFR) plus a spread, the arbitrage has become wide enough to make the strategy economic at meaningful scale. The June 23 note clarifies the rules around this structure, which helped draw $26 billion in FCNR-B deposits in 2013.

The economics, as reported by the Economic Times, can deliver returns well above what most US-based accounts pay. An NRI putting in $1 million of personal capital and borrowing nine times that amount can generate annual returns of around $220,000, or 21.8 percent on the original capital, before US tax. The structure was used during the 2013 FCNR-B mobilisation drive, and the June 23 note is the 2026 version of those rules.

A Rupee at 94.73 and the Defence Mechanism Behind It

The clarifications landed against a backdrop of pressure on the rupee that the June 5 package was designed to relieve. The rupee ended at Rs 94.73 per dollar on June 23, against Rs 94.69 in the prior session, and has been sliding against a firmer dollar for months. Moneycontrol reported that the rupee could see appreciation in the coming days as inflows via the FCNR-B deposit route start trickling in.

MUFG Research, in a note dated June 8, 2026, estimated that the broader June 5 package could bring in around $40 billion in foreign currency flows. The bank’s economists projected USD/INR at 94.00 by the September quarter, before a rebound towards 96.00 the following calendar year. The rupee’s 94.73 close on June 23 sits just above that stronger forecast, a sign that the scheme is at least delaying the slide. Forecasts of $20bn to $40bn in FCNR-B inflows are the working estimates for the policy.

The FCNR-B programme is the second major swap window the RBI has run under external pressure. The first, in September 2013 under then-governor Raghuram Rajan, drew $26 billion in fresh FCNR-B deposits and $34 billion in total under related measures. HDFC Bank was the single largest mobiliser in 2013 at $3.4 billion, followed by State Bank of India at $3.07 billion and ICICI Bank at $2 billion.

The June 23 note doesn’t say how much of the $20 billion to $40 billion range the FCNR-B route will actually deliver, and the central bank’s silence on a specific target is deliberate. RBI officials have consistently avoided putting a number on what the swap window is meant to bring in, pointing instead to the broader balance of payments gap. Brokerage estimates cited by the Economic Times are higher than MUFG’s base case, putting combined inflows under the 2026 window at $50-55 billion. That is more than the $34 billion the central bank pulled in under a similar programme in 2013, and roughly 1.2 per cent of gross domestic product.

What 2013 Had That 2026 Does Not

The 2013 episode worked because of a rate environment that is no longer in place. Indian three-year government bond yields were above 9 percent, comparable US rates were below 1 percent, and the spread between the two was more than 8 percentage points. Banks could borrow dollars cheaply from NRIs, deploy the proceeds at high Indian rates, and pocket the spread, with the RBI absorbing the currency risk.

The 2026 rate environment is much narrower. Indian three-year yields sit in the mid-6 percent range, US three-year yields are around 4 percent, and the spread is roughly 2.4 percentage points, less than a third of what it was in 2013. With US Treasury yields around 4.5 percent and a tighter arbitrage, the economics of borrowed-dollar FCNR-B structures are workable but less generous than the 2013 episode. How the 2013 spread powered $34 billion in FCNR-B inflows is the comparison the 2026 scheme has to beat.

Banks Push to the Top of the Rate Sheet

The June 23 clarification’s job is to make sure the FCNR-B route delivers as much of the $20 billion to $40 billion range as it can. With US Treasury yields compressing the arbitrage and the deposit window closing on September 30, banks have roughly three months to mobilise fresh funds. The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) exemptions on eligible deposits, which remove another drag on bank economics, are also part of the package.

Several lenders have already moved to the top of the rate table, with Yes Bank, Canara Bank, South Indian Bank, and AU Small Finance Bank among those raising FCNR-B deposit rates to 7.1 percent, Moneycontrol reported. AU Small Finance Bank is offering 7.10 percent on three to four year USD FCNR-B deposits, and State Bank of India raised its three to five year FCNR dollar rates by 230 to 265 basis points to 5.25 to 6 percent. HDFC Bank lifted its three to five year rates to 6 percent from 3.40 to 3.65 percent earlier, with the borrowed-money NRI deposit structure and its return math detailed by the Economic Times. ICICI Bank and Axis Bank are now at 6 percent for three to five year deposits, up from around 3 to 4 percent before the scheme opened.

Whether that translates into the inflows MUFG expects or the higher range brokerages are hoping for, the scheme is the second pillar of the RBI’s rupee defence, alongside the removal of capital gains tax for foreign portfolio investors. The $33.8 billion in outstanding FCNR-B balances at the end of March 2026 is the base the new window is building on, after FCNR-B inflows collapsed to $946 million in FY26 from $7.08 billion in FY25. The deposit window closes on September 30, with the swap facility available until October 16, leaving banks three months to rebuild a channel that has been shrinking for years.

• 7.10%: AU Small Finance Bank USD FCNR-B rate for 3-4 year deposits (June 11, 2026)
• $33.8 billion: Outstanding FCNR-B deposits at end of FY26
• $20 billion: MUFG base case for FCNR-B inflows under the 2026 scheme
• $50-55 billion: Brokerage estimate for combined 2026 scheme inflows
• 2.4 percentage points: India-US 3-year yield spread in 2026, vs more than 8 in 2013

Disclaimer: This article is for informational purposes only and does not constitute investment advice. FCNR-B deposits carry currency, interest rate, and counterparty risks, and investors should consult a qualified financial professional before making decisions. Figures are accurate as of publication date.