FCNR-B Flows Taper as Higher Costs Trip Math for Double-Digit Returns

New Delhi, India Jul 9, 2026 ALN: Mumbai: The pace of garnering special foreign currency (FCNR-B) deposits by Indian banks appears to have slowed after an enthusiastic start, bankers said, as high-net-worth overseas Indians seek double-digit dollar returns and assess some tax implications on the instruments. Overseas borrowing costs, meanwhile, have caused a rethink for banks on the amount of leverage they can offer clients.

The Leverage Math

"The issue is the pricing of dollar funds, which is key to ensuring that high net worth individuals (HNIs) get enough leverage on their funds that will ultimately lead to double-digit returns," said a banker aware of the situation. "But dollar funds - both on bonds and loans - have been more expensive as foreign banks are seeking a higher price. So, what was available at 100 basis points above the benchmark rate is now costing 150 basis points over the benchmark rates, which have skewed the calculations."

One basis point is a hundredth of a percentage point. Hence, Indian banks with overseas branches are still fine-tuning their deposit mobilization strategy under the special programme, even as chunky inflows are yet to come in a month after the Reserve Bank of India (RBI) published guidelines for garnering the three- and five-year deposits with a hedging backstop provided by the regulator.

The success of the programme is based on how much banks can borrow abroad and lend to their HNI clients. Banks could offer up to nine leverage on a $1 million deposit, promising them a 14.08% yield on deposits after leverage, compared with the upfront offer of a 6% dollar-based interest on a five-year lock-in.

To a potential client with $1 million in ready cash in the US, a New York branch of an Indian bank can lend $9 million to this person, allowing her to leverage her deposit ninefold. This means she now has $10 million in FCNR (B) deposits.

If the branch has borrowed the money at 5% overseas and lends to this client at 5.5%, the branch makes 0.5% in profits. This client brings the money to India and deposits it as a FCNR (B) at 6%, which means she is also making half a percentage point more by borrowing the funds.

If the leverage is extrapolated over a five-year period, the client earns 6% on her own $1 million and 0.5% on the rest of $9 million, which could give her 14% returns over a three-year period. But overseas rates have spiked, forcing Indian banks to recalibrate their plans.

State Bank of India (SBI) and Bank of Baroda (BoB) had to pull back their dollar bond issues last month because investors demanded a higher spread over the benchmark US treasury, noting the huge supply from India.

Overseas investors have raised their price expectations ever since HDFC Bank raised $750 million by selling five-year bonds to overseas investors priced at 90 basis points above the five-year US treasury, the tightest spread over the US benchmark for any private sector bank in India.

The dynamics surrounding the FCNR-B deposits are crucial for understanding the broader context of India's banking sector and its interaction with global financial . The FCNR-B scheme allows non-resident Indians (NRIs) to deposit foreign currency with Indian banks, providing them with an opportunity to earn interest on their deposits while also hedging against currency risk. This scheme is particularly appealing to NRIs who want to invest their funds in India while still benefiting from the stability of foreign currencies.

However, the recent slowdown in the inflow of FCNR-B deposits highlights the challenges faced by Indian banks in a competitive global environment. As the demand for double-digit returns increases among HNIs, banks must navigate the complexities of international borrowing costs and the associated risks. This situation is compounded by the fact that many overseas investors are now seeking higher returns, leading to tighter spreads and increased costs for Indian banks looking to raise funds abroad.

The implications of this slowdown are significant. If Indian banks are unable to attract sufficient FCNR-B deposits, it could limit their ability to lend to HNIs and impact their overall liquidity. This, in turn, could affect the banks' profitability and their capacity to support the growing demand for credit in India. The competition for deposits is likely to intensify as banks look for innovative ways to attract NRIs, potentially leading to higher interest rates on FCNR-B deposits.

Moreover, the regulatory framework established by the Reserve Bank of India plays a pivotal role in shaping the landscape for FCNR-B deposits. The RBI's guidelines for the special programme aim to create a conducive environment for banks to mobilize funds from overseas, but the effectiveness of these measures will depend on how well banks can adapt to changing market conditions. The RBI's focus on ensuring a hedging backstop is crucial, as it provides a level of security for both banks and depositors in an increasingly volatile global financial environment.

Additionally, the recent trends in global interest rates and the overall climate will continue to influence the attractiveness of FCNR-B deposits. As central banks around the world adjust their monetary policies in response to inflationary pressures and uncertainties, the cost of borrowing in international is likely to fluctuate. Indian banks will need to remain vigilant and responsive to these changes to maintain their competitiveness in attracting overseas deposits.

Furthermore, the interaction between domestic conditions and global market dynamics cannot be overlooked. As India continues to grow as an powerhouse, the demand for foreign investments is likely to rise. This presents an opportunity for Indian banks to capitalize on the interest of HNIs and overseas investors. However, achieving this requires a delicate balance between offering attractive returns and managing the associated risks of international borrowing.

In conclusion, the tapering of FCNR-B flows due to higher overseas borrowing costs reflects the complexities of the global financial landscape and the challenges faced by Indian banks in attracting high-net-worth clients. As they navigate these challenges, banks must develop innovative strategies to enhance their deposit mobilization efforts while remaining compliant with regulatory guidelines. The future of FCNR-B deposits will depend on the ability of banks to adapt to changing market conditions and effectively manage the interplay between domestic and international financial dynamics.