Fresh FCNR(B) deposits may lift banks' NIMs by up to 4 bps, ease funding cost pressures: Systematix
New Delhi, June 15
Fresh Foreign Currency Non-Resident deposits mobilised under the Reserve Bank of India's latest concessional swap facility are expected to provide a modest boost to banks' net interest margins while significantly easing funding pressures in the banking system, according to a report by Systematix Research.
The report noted that banks have responded to the RBI's June 2026 measures by increasing FCNR(B) deposit rates, with most lenders now offering between 5.25 per cent and 7.1 per cent on such deposits.
Highlighting the margin advantage of these deposits, the report said, "Our calculations show a 60 bps higher NIM on FCNR(B) deposits." The benefit stems from the RBI's decision to exempt fresh FCNR(B) deposits mobilised until September 30, 2026, from statutory liquidity ratio (SLR) and cash reserve ratio (CRR) requirements.
Unlike domestic deposits, where banks are required to maintain 18 per cent SLR and 3 per cent CRR, FCNR(B) deposits can be deployed entirely towards advances, improving earning potential.
Explaining the impact, the report stated, "Based on these assumptions, the NIM for domestic deposits is around 2.6%, whereas for FCNR(B) deposits it is 3.0%. Hence, the margin on FCNR(B) deposits is higher by approximately 60 bps compared to domestically sourced term deposits at a similar cost."
However, the direct impact on sector-wide profitability is likely to remain limited because FCNR(B) deposits are expected to form only a small portion of banks' overall deposit base.
The report estimated that FCNR(B) deposits would account for about 1-3 per cent of total deposits for most banks under its coverage universe. Consequently, "We estimate that the spread benefit to NIMs from FCNR(B) deposits will be limited to a maximum of 2-4 bps," it added.
Despite the modest direct NIM accretion, the report sees broader benefits for the banking sector. It expects FCNR(B) deposits to account for 10-15 per cent of incremental deposit mobilisation, helping banks reduce dependence on the certificates of deposit (CD) market, where borrowing costs have remained elevated.
According to the report, "FCNR(B) deposits are expected to comprise 10-15% of incremental deposits, easing pressure on the CD market and lowering overall cost of funds."
The report added that the resulting moderation in funding costs would particularly benefit banks with higher credit-deposit ratios, including HDFC Bank, Axis Bank and Bank of Baroda.
The RBI's special swap window, announced earlier this month, allows banks to swap fresh three-to-five-year FCNR(B) deposits with the central bank at effectively zero hedging cost, a move aimed at attracting foreign currency inflows, supporting the rupee and strengthening India's forex reserves.
Systematix said the overall impact of the measure is "significantly positive for the overall banking sector" as it provides fresh liquidity in an otherwise crowded credit-deposit market.
— ANI
Reader Comments
The 60 bps margin advantage on FCNR(B) deposits is interesting, but why are we always chasing foreign deposits? Our own domestic savings rate is declining. RBI should focus on improving household financial inclusion and encouraging domestic deposits rather than relying on volatile foreign flows. Just my two paise.
As an NRI living in the US, these 5.25-7.1% rates on FCNR deposits are tempting but the 3-5 year lock-in period is too long. I'd rather invest in Indian equities or mutual funds for better returns. Still, it's good to see India actively managing forex reserves and rupee stability. 👍
Finally some relief for the banking sector! The CD market has been bleeding with high costs. If FCNR(B) deposits can ease 10-15% of incremental funding needs, that's a meaningful reduction in systemic risk. But let's not forget - this is a temporary window till Sep 2026. Need more structural reforms to attract stable foreign capital.
I work in treasury for a major Indian bank. The zero hedging cost swap window is a game-changer for us. Earlier, hedging costs were eating into our margins on FCNR deposits. With RBI absorbing that cost, we can offer competitive rates to NRIs while still making decent spreads. Smart policy move overall.
While this is good for banks' bottom lines, I'm concerned about the impact on depositors. Banks might shift focus from domestic term deposits to FCNR deposits, leaving small savers with lower rates. The common man's savings still matter
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