FCNR Deposits Offer Up to 7.1% Tax-Free Dol‌lar Returns Aft‌‌er RBI Mov‌e; Special Window Open Til‌l 30 September 2026

Mumbai, June 22: Non-Resident Indians (NRIs) are witnessing a considerable shift in foreign currency deposit opportunities after the Reserve Bank of India (RBI) introduced measures aimed at bo‌os‌‌t‌‌ing Foreign Currency Non-Resident (Banks) [FC‌‌NR(B)] deposits. Following the recent review of June’s monetary policy by the central bank and subsequent regulatory changes, a number of financial institutions have raised the interest rate on FCNR(B) deposits, now offering up to 7.1% per annum for 3-5 year US dollar deposits. 

The move follows the RBI’s announcement that it would foot the entire foreign exchange hedge cost on fresh FCNR(B) deposits raised between three-year and five-year maturities till September 30, 2026. The central bank also removed the cap on interest rates that banks could offer on these deposits, enabling lenders to attract overseas investments. 

RB‌I’s 30 September 2026 Window Pushes FC‌‌NR Rates to 7.1% 

The re‌‌cent measure‌‌s ta‌ken by RBI have led to a significant increase in the deposit rates offered on FCNR(B). While most major banks are offering around 6% for deposits in U.S dollars, some smaller banks have been offering even higher interest rates than this. On 18 June, Eq‌uitas Small Finance Ba‌nk increased the FCNR(B) deposit interest rate to 7.1% p‌er year with tenures ranging from three to five years. 

These revised rates have been a significant increase from the previous rates on FCNR(B) deposits, which have generally remained between 3.5% and 4%. The ra‌‌te dif‌ferent‌ial has become especially notable when compared to prevailing rates of US Treasury bills, which currently stand at 4%-4.2%, thus generating a spread of about 2-3 percentage points for eligible depositors. 

Tax-Free Dollar Income Gains Momentum as Currency Risk Disappears 

FCNR(B) deposits allow NRIs to maintain fixed deposits in foreign currencies without converting funds into Indian rupees. Under the scheme, depositors can place funds in currencies such as the US dollar (USD), British pound (GBP), Singapore dollar (SGD), Canadian dollar (CAD) and Australian dollar (AUD). 

Unlike traditional Non-Resident External (NRE) fixed deposits, FCNR(B) deposits retain the original foreign currency throughout the investment period. At maturity, both the principal and accrued interest are returned in the same foreign currency, eliminating exposure to rupee exchange-rate fluctuations. 

Another key feature of the scheme is that both the deposit amount and interest income remain tax-free in India, while funds are fully repatriable. The facility is available to NRIs, Overseas Citizens of India (OCIs) and Persons of Indian Origin (PIOs). 

Exemptions From CRR And SLR Strengthen Bank Participation 

The RBI’s latest initiative has also made FCNR(B) deposits more attractive for banks seeking overseas funds. Fresh FCNR(B) deposits mobilised under the scheme are exempt from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements. 

These exemptions reduce regulatory costs for banks and provide greater flexibility in mobilising foreign currency deposits. The current framework is considered more expansive than the RBI’s 2013 FCNR(B) mobilisation programme, under which hedging costs were capped at 3.5%, yet the banking system still attracted approximately $34 billion in deposits. 

The latest policy removes the hedging burden entirely for eligible deposits during the specified window, creating stronger incentives for both banks and depositors. 

FCNR Deposits Differ from NRE Deposits on Currency Exposure 

Although both FCNR(B) and NRE fixed deposits offer tax-free interest in India and permit full repatriation of funds, the underlying currency structure differs significantly. 

NRE deposits are maintained in Indian rupees, meaning returns are ultimately influenced by movements in the rupee against global currencies. FCNR(B) deposits, on the other hand, remain denominated in the original foreign currency throughout their tenure. 

According to the information accompanying the RBI measures, the Indian rupee has depreciated by approximately 4%-4.5% annually against the US dollar since 1991. As a result, returns earned through rupee-denominated deposits may be affected by currency movements when measured in dollar terms, whereas FCNR(B) deposits do not carry such exposure. 

SBLC-Linked Structure Highlights Higher Return Potential 

Alongside the rise in FCNR(B) rates, market participants have highlighted the potential use of a Standby Letter of Credit (SBLC) structure linked to FCNR(B) deposits. 

Under the example being discussed, an NRI placing $100,000 in an FCNR(B) deposit earning approximately 7% may obtain an SBLC from an Indian bank against the deposit. The SBLC can then be used to secure financing from a foreign bank. 

In the illustrative calculation, a depositor obtains financing of up to nine times the original deposit value, resulting in a loan amount of $900,000 at an assumed borrowing cost of 5%. If those borrowed funds are subsequently placed into an FCNR(B) deposit earning 7%, the spread between borrowing and deposit rates is 2 percentage points. 

The illustration indicates that such a structure could generate an effective return of approximately $25,000 on an original $100,000 deposit, equivalent to a 25% tax-free return in India. However, the calculations also note that higher borrowing costs, such as 5.5%, would reduce the overall return. Additional costs, including SBLC issuance charges, loan-related expenses and taxation in the depositor’s country of residence, may also affect outcomes. 

Lenders 7.1% Rate Highlights Competitive Shift 

The increase in FCNR(B) rates by lenders reflects growing competition for overseas deposits following the RBI’s regulatory easing. With the special window remaining available until 30 September 2026, banks have begun adjusting deposit rates to attract foreign currency inflows from the global Indian diaspora. 

The latest developments have positioned FCNR(B) deposits among the highest-yielding tax-free dollar-denominated deposit products currently available within the Indian banking system. 

The RBI’s temporary FCNR(B) deposit framework remains available until 30 September 2026, allowing eligible NRIs, OCIs and PIOs to access enhanced foreign currency deposit rates of up to 7.1% on select tenures. Depositors may review factors such as currency denomination, applicable taxation in their country of residence, deposit tenure, repatriation features and any associated banking charges before opting for the facility. 

Source 

• https://www.rbi.org.in/