One of the largest recent developments in India’s banking and foreign exchange market isFCNR(B)deposits in 2026. RBI’s special foreign-currency mobilization initiative has ensured record inflows, strengthening India’s external position and creating a significant liquidity surplus in the domestic banking sector simultaneously. However, one of the most asked questions now is: DoFCNR(B)deposits constitute a costly source of funding for Indian banks?
The evidence so far points to yes.
Though they pay interest on these foreign-currency deposits, compared with other conventional sources of long-term domestic financing such as a three-to-five-year domestic deposit, FCNR(B) funding is not expensive, at about 5.25-6%.
What is FCNR(B) deposit?
Foreign Currency Non-Resident Bank (FCNR-B) Deposits are term deposits, eligible non-residents can maintain in specified foreign currencies instead of in Indian rupees. Depositors do not directly bear exchange rate risk related to Indian rupee as the deposit is in a foreign currency. The deposits have witnessed significant importance particularly in 2026, thanks to RBI’s extraordinary initiative to attract capital from outside.
The total inflow of dollar reserves via FCNR(B), offshore financial centre borrowings, external commercial borrowings in 2026 stood at $136.4 billion, of whichFCNR(B)deposits formed a significant portion.
Why some investors claimFCNR(B)funding is costly?
Prima facie,FCNR(B)deposits appear costlier owing to an attractive interest rate being offered to global depositors for remitting funds to the Indian banking system. Banks benchmark their costs of foreign-currency deposits with the rate offered on domestic deposits, or wholesale borrowings, among others. However, just relying on the interest rate might provide an incomplete perspective. Data cited from Bank of America Securities recently has revealed that while Indian banks offered between 6.5% and 7.5% interest rates on three-to-five-year long-term domestic deposits, bigger banks recently offered as low as 5.25-6% onFCNR(B)deposits. Thus, this data suggest thatFCNR(B)deposits indeed come up as competitive or may be cheaper.
RBI takes care of currency risk
A great benefit in this case is for banks is due to the structure under RBI’s guarantee program. As per this arrangement, Indian banks are largely safe from exchange rate risk arising on funds transferred to India because RBI implicitly takes this risk via a swap facility offered.
In addition to lower interest rates,FCNR(B)deposits are also cheaper in terms of reserves compared to its other alternatives like rupee deposits as CRR and SLR rates do not apply on it. Banks also enjoy an added degree of flexibility on deploying funds from these deposits.
Inflow’s impact on forex reserve
As discussed, due to the massive capital inflows the RBI’s overall forex reserves have reached a record level and Indian foreign-exchange position strengthened. Reuters said that the RBI intervening in forex markets in a major way also the centeal bank is using dollar inflows to contain volatility on rupee’s fall or rise. This strengthened forex reserves acts as a buffer against any shock or financial turbulence in the form of oil price rise, or external shocks, etc.
But there is also excessive liquidity issue
While theFCNR(B)program had brought so much liquidity that it has caused problems for India’s banks. Liquidity in Indian banking system increased past 11 lakh crore with an intent to be absorbed by RBI through various operations. Variable Reverse Repo rate operations are being undertaken by RBI to soak up liquidity. Although, excess liquidity is good for lending, too much of it also leads to several complexities relating to monetary policy transmission and causes inflationary pressure.
What about matury onFCNR(B)deposits?
Another key concern withFCNR(B)deposits is whether these deposits will stay back in India when they matures. These deposits offer a fixed maturity period for investors, once matured it is likely that deposits and their generated interests may be repatriated back abroad by the investor. However analysts do state it may not always happen so as deposit will be re-invested if favorable returns from India persist. Ultimately it depends on interest rate, exchange rate movements and attraction from Indian market.
Implications for Indian banks
FCNR(B)deposits offer banks much needed flexibility for their funding sources amid challenging domestic deposits competition. The higher liquidity in banks is likely to reduce need to look for expensive wholesale funding in a way which may enhance lendigng growth and private lenders, especially can avail benefits if stronger foreign-currency inflow contribute in their funding profile, and in many cases already had. Maturity management still the priority.
Final words
The assertion thatFCNR(B)deposit is just an expensive fundraising tool is unlikely, compared on taking everything inclusive of the interest rate offered, foreign-exchange risk, CRR, SLR rate, maturity, etc together, it could turn out to be competitive and beneficial for banks. But, indeed the program had resulted in some challenges due to excess liquidity. What matters now for the banks are effective use of these dollars in boosting credit growth for sustainable economy rather than worrying about a dear currency, as India now has adequate foreign-exchange reserve as buffer against any untoward incident.
