RBI FCNR(B) window till Sep 2026 boosts bank funding

Why the RBI move matters for banks

India’s banking system is entering FY27 with a familiar challenge: loan growth has been running well ahead of deposit growth, increasing the need for alternative funding sources. Against this backdrop, the Reserve Bank of India’s latest measures to attract foreign currency deposits have come as a timely support for lenders. Crisil Intelligence said overseas inflows could provide incremental support to banks’ deposit mobilisation in the current fiscal year. The report also flagged that the rest-of-the-world (ROW) segment, which includes non-resident deposits, may see a modest uptick in FY27 and supplement overall deposit growth.

The changes are especially relevant for smaller banks, which have faced tighter competition for domestic deposits in recent months. Bankers cited in the report said the relaxation followed requests from smaller lenders. The central idea is straightforward: give banks more flexibility to price NRI deposits, and allow foreign currency inflows to ease system-wide funding pressures.

What the RBI changed on FCNR(B) deposits

The RBI withdrew the interest rate ceiling on fresh foreign currency non-resident bank, or FCNR(B), deposits for three-to-five-year tenors until September 30, 2026. Crisil Intelligence said the removal of the ceiling gives banks greater flexibility to offer competitive rates and support foreign currency deposit inflows. Until September 30, banks can offer interest rates on these deposits without linking them to comparable domestic term deposit rates.

Bankers said some lenders, particularly smaller banks, may raise rates further on FCNR(B) deposits to attract overseas funds. The relaxation is positioned as a temporary window that reduces constraints on deposit pricing, rather than a permanent change to the deposit framework. A market participant described the measure as aimed at removing the earlier constraint for a specified period and giving banks more freedom to attract foreign currency inflows.

NRE deposits also get relief for longer maturities

The RBI’s relaxation also covers non-resident external (NRE) deposits with maturities of three years and above. Bankers said lenders may use a combination of higher FCNR(B) and NRE deposit rates to attract overseas funds, particularly from NRIs seeking longer-tenor products. This matters because longer-tenor deposits can improve the stability of banks’ liability profiles.

The relaxation also supports banks that have foreign currency funding needs and want to diversify beyond domestic deposits. Bankers linked the policy shift to broader efforts to mobilise overseas funds during a period of elevated funding competition. The time limit, capped at September 30, 2026, gives banks clarity on the window in which they can actively market and price such deposits.

Swap facility, hedging support, and regulatory exemptions

Beyond deposit pricing flexibility, the RBI’s special FCNR(B) scheme includes a swap facility that absorbs hedging costs, according to the report. The deposits are also exempt from statutory liquidity ratio (SLR) and cash reserve ratio (CRR) requirements. Analysts and bankers described these exemptions as a structural advantage versus domestic deposits, which are subject to 18% SLR and 3% CRR.

Systematix Institutional Equities, through analyst Siddharth Rajpurohit, said their calculations show a 60 basis points higher net interest margin (NIM) on FCNR(B) deposits. The note added that the direct NIM benefit for its coverage banks is modest at 2-4 basis points due to the limited share of such deposits. Even so, the exemption-driven economics can help banks lower their overall cost of funds and reduce pressure in wholesale funding markets.

How much inflow the street is modelling

Forecasts vary, but market commentary in the report placed potential inflows in a broad band. Emkay Global Financial Services said it expects $10 billion in inflows through the FCNR(B) scheme. Goldman Sachs economists Arjun Varma and Santanu Sengupta said RBI measures could help drive $10 billion of additional capital inflows and projected a balance of payments surplus of around 0.6% in the current financial year.

Motilal Oswal Financial Services’ Nitin Aggarwal estimated $10-50 billion in additional forex flows in the year ending March 2027, helping business growth for the banking system. In a separate market view, Nischal Maheshwari described the initiative as capable of attracting more than $10 billion in foreign currency inflows, supporting the rupee and improving liquidity. Another commentary pegged the “hope” for inflows at $10-50 billion, highlighting the uncertainty around eventual take-up.

Deposit growth pressure: the credit-deposit gap in focus

RBI data cited in the report showed outstanding bank credit rose to Rs 215.15 lakh crore in the fortnight ended May 31, while deposit growth lagged at 12.21%. The report also said bank credit expanded 17.65% year-on-year in that fortnight, significantly outpacing deposit growth and widening funding pressures.

In this context, FCNR(B) deposits are seen as an additional source of funds that could reduce the need for banks to compete aggressively for domestic deposits. Crisil Intelligence expects the ROW segment’s contribution to overall deposits to rise modestly in FY27, which would supplement system-wide deposit growth rather than replace domestic mobilisation.

Cost of funds and incremental deposit mix

Systematix said FCNR(B) deposits are expected to comprise 10-15% of incremental deposits, easing pressure on the certificate of deposit market and lowering overall cost of funds. This is important because wholesale deposit rates had remained elevated in recent months, according to the market commentary cited. Emkay’s June 14 report said it expects credit growth to sustain at 14.7% for FY27, funded by 13% FCNR-aided deposit growth.

Another analyst view in the report estimated the scheme could add about 1.8% to the domestic deposit base and significantly boost overall liquidity, even after RBI intervention to mop up excess liquidity. A separate market participant estimate suggested incremental deposits of around $15-30 billion, equivalent to about 1-2% of outstanding deposits, indicating that even moderate inflows can matter at the margin.

Market reaction: banks back in focus in derivatives

The report also linked the RBI measures to shifting sentiment in banking stocks. Traders were described as piling into bullish derivative bets on banks and reversing some earlier bearish positions. Akshay Bhagwat, associate director for derivatives research at JM Financial Services, said the RBI’s FCNR(B) deposit rate mechanism is driving long delta additions in banking stocks.

The broader argument is that lower-cost foreign currency deposits, with hedging costs absorbed and regulatory requirements eased, can strengthen funding profiles and reduce anxiety about funding the credit cycle. For markets, that translates into renewed interest in banks, which have a large weight in benchmark indices.

Key numbers at a glance

What investors should track through Sep 30, 2026

The window’s effectiveness will depend on the pricing banks offer and the demand from NRIs for longer-tenor FCNR(B) and NRE products. Investors will also watch whether inflows materially narrow the loan-deposit gap and ease system liquidity pressures. Analysts have linked the scheme to potential support for the rupee and the balance of payments, including the possibility that expected external gaps could narrow if multiple inflow channels align.

The next few months should also show whether the benefit is concentrated in larger banks, as some analysts expect, or whether smaller lenders meaningfully increase their share. For the banking sector, the most immediate metric is whether the additional foreign currency deposits reduce reliance on expensive wholesale funding and stabilize the cost of funds.

Conclusion

RBI’s temporary relaxation on FCNR(B) pricing and longer-tenor NRE deposits, coupled with swap and regulatory exemptions, is designed to attract overseas funds and ease funding pressures as credit growth outpaces deposits. Analysts estimate potential inflows ranging from about $10 billion to $10 billion, with expectations that the window remains open until September 30, 2026. The near-term focus will be on how quickly banks mobilise these deposits, and whether the additional liquidity shows up in funding costs, deposit growth, and overall system conditions through FY27.