A day after the Reserve Bank of India (RBI) released the final contours of its foreign currency non-resident bank [FCNR(B)] deposit scheme, banks have started offering rates ranging from 5% to over 7%. The higher returns reflect the central bank’s decision to exempt incremental FCNR(B) deposits from cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements, experts said.
State Bank of India has launched a special deposit scheme, SBI Advantage FCNR(B), with a one-year lock-in period, offering interest rates of 5.25-6% in the three- to five-year maturity bucket.
HDFC Bank and Central Bank of India are offering up to 6% on longer-tenor FCNR(B) deposits, while YES Bank and AU Small Finance Bank are offering as much as 7.1% on five-year deposits. CSB Bank is offering 7.05% on FCNR(B) deposits. The revised rates came into effect on June 10.
HDFC Bank increased its FCNR(B) rates by 235-260 basis points in the three- to five-year bucket, while YES Bank raised rates by 300-335 basis points for similar tenors.
Banks expect a strong response, particularly after the RBI permitted the use of leverage — a move that could significantly boost inflows into the scheme.
The leverage facility allows NRIs to borrow overseas and place those funds in FCNR(B) deposits to capture the arbitrage opportunity. For instance, an NRI can invest $200 of personal capital, borrow $800 from a foreign lender, and have an Indian bank issue a standby letter of credit to back the foreign loan.
“The RBI has effectively created one of the most attractive dollar investment opportunities available globally. Banks could offer around 6% on five-year FCNR(B) deposits and, if leverage of up to 9x is available as it was in 2013, NRI investors could potentially earn mid-teen returns in dollar terms,” said Ananth Narayan, former whole time director, the Securities and Exchange Board of India.
He added that for an economy with India’s strong track record on external obligations, such returns are exceptionally attractive on a risk-adjusted basis.
Jefferies said the RBI’s decision to permit banks to issue standby letters of credit to lenders of deposit customers could help investors leverage their capital and enhance returns. “We estimate that with 7-10x leverage and a spread of 1.5-2% , customers can generate annual returns of 17-27% over three to five years,” the brokerage said.
Most market participants expect inflows of $45-50 billion through the FCNR(B) route alone — a significant improvement from what was expected after Friday’s announcement.
“Overall, this appears to be an attractive opportunity that should help offset this year’s current account deficit. The RBI is now covering the full hedging cost for FCNR(B) deposits. This will neutralise the interest-rate differential and enable banks to offer higher rates,” said Anitha Rangan, chief economist, RBL Bank.
The repricing has brought FCNR(B) rates closer to domestic deposit rates at several lenders. However, experts believe that banks will not increase it over domestic deposit rates. “While some banks may offer rates of around 7%, most are likely to cap them broadly in line with domestic deposit rates,” said Sanjay Agarwal, senior director, CareEdge Ratings.
At present, Karur Vysya Bank is an outlier, offering 7% on US dollar FCNR(B) deposits for three- and five-year tenors, compared with 6.55% on comparable domestic deposits below Rs 3 crore.
Bankers expect more lenders to revisit FCNR(B) pricing in the coming weeks as competition for NRI deposits intensifies.
“Each bank will compare FCNR(B) deposits with its alternative cost of funds. What makes sense for one bank may not make sense for another, which is why pricing strategies are likely to vary across lenders,” said a senior banker.
With the regulatory window remaining open until September 30, banks are expected to step up efforts to mobilise NRI deposits and strengthen their foreign-currency funding base.