Source: ET
Context
The Reserve Bank of India (RBI) on 17 June 2026 temporarily withdrew the interest rate ceiling on fresh Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits with maturities of 3 years and above up to 5 years, until 30 September 2026. Separately, the RBI also temporarily removed restrictions on interest rates for fresh Non-Resident External (NRE) deposits of 3 years and above, including deposits renewed on maturity, until 30 September 2026. The amendment was issued under Section 35A of the Banking Regulation Act, 1949, modifying the Commercial Banks Interest Rate on Deposits Directions, 2025. This move builds on the earlier FCNR(B) swap facility (announced 8 June 2026) under which the RBI bears the full hedging cost for banks. Following these moves, banks like AU Small Finance Bank (7.10 per cent), Karur Vysya Bank (7 per cent), CSB Bank (6.95 per cent), and Yes Bank (6.6 per cent) have raised FCNR(B) rates. SBI Research estimates USD 40-45 billion inflows via the FCNR(B) route alone, with combined inflows of USD 55-65 billion likely in FY27.
On NRE Deposits
- Restrictions removed on interest rates for fresh NRE deposits of 3 years and above.
- Banks no longer bound by the requirement that rates must not exceed those on comparable domestic rupee term deposits.
- Same validity: Until 30 September 2026.
Important Exception
- Transfers from NRO accounts to NRE accounts will NOT qualify for the exemption.
Legal Basis
- Section 35A of Banking Regulation Act, 1949.
- Modifies: Commercial Banks Interest Rate on Deposits Directions, 2025.
Prior Ceilings (Before Relaxation)
| Maturity | Previous Ceiling |
|---|---|
| 3-5 years | Overnight ARR/swap rate + 350 bps |
| 1 year to less than 3 years | Overnight ARR/swap rate + 250 bps (still applicable) |
FCNR(B) Swap Facility
- Window for fresh FCNR(B) deposits with 3-5 year maturity.
- Deposits must be opened: Between 8 June and 30 September 2026.
- Banks can access RBI swap until: 16 October 2026.
- 1-year lock-in from deposit opening date.
- Exempt from CRR and SLR maintenance for these deposits.
- RBI absorbs the full hedging cost (about 3-3.5 per cent annually).
- Swaps cannot be cancelled once executed with RBI.
What is FCNR(B)?
- Foreign Currency Non-Resident (Bank) deposit.
- A term deposit account for Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs).
- Held in foreign currency: USD, GBP, EUR, JPY, CAD, AUD, etc.
- Tenure: 1 to 5 years.
- Key features:
- No exchange rate risk for depositor (currency same throughout tenure).
- Interest is tax-free in India.
- Funds and interest are fully repatriable.
What is NRE Deposit?
- Non-Resident External (NRE) Account.
- A rupee-denominated account for NRIs and PIOs.
- Funds sourced from foreign income.
- Key features:
- Interest is tax-free in India.
- Funds and interest are fully repatriable.
- Exchange rate risk for depositor (since denominated in INR).
- Can be: Savings, Current, or Term Deposit.
What is NRO Deposit?
- Non-Resident Ordinary (NRO) Account.
- A rupee-denominated account for NRIs.
- Funds sourced from Indian income (rent, dividends, etc.).
- Interest is taxable in India.
- Repatriation restricted: USD 1 million per year limit.
FCNR(B) vs NRE vs NRO
| Feature | FCNR(B) | NRE | NRO |
|---|---|---|---|
| Currency | Foreign (USD, GBP, etc.) | Rupee | Rupee |
| Source of funds | Foreign earnings | Foreign earnings | Indian income |
| Interest taxable | No (tax-free) | No (tax-free) | Yes |
| Repatriation | Fully repatriable | Fully repatriable | Restricted (USD 1 mn/yr) |
| Exchange rate risk | No | Yes | N/A (domestic income) |
What is the FCNR(B) Swap Facility?
- Announced: 8 June 2026 (some sources cite 5 June).
- Mechanism: RBI takes on the hedging cost (3-3.5 per cent annually) for banks on eligible FCNR(B) deposits.
- Effect: Banks can offer higher rates (5.5-7.1 per cent) on USD FCNR(B) deposits.
- Benefits to banks: No CRR/SLR maintenance; lower hedging cost.
What is the OFCB Swap Facility?
- Overseas Foreign Currency Borrowing.
- Fixed rate of 1.5 per cent per annum for:
- PSUs raising ECBs.
- Banks’ overseas borrowings.
- This is different from the FCNR(B) Swap Facility (where RBI bears the full hedging cost, not at 1.5 per cent).
About Alternative Reference Rates (ARRs)
- The replacement for LIBOR (London Interbank Offered Rate), which was phased out by 30 June 2023.
- Key ARRs:
- SOFR (Secured Overnight Financing Rate): For USD (replaced USD LIBOR on 30 June 2023).
- SONIA (Sterling Overnight Index Average): For GBP (LIBOR ceased 31 December 2021).
- TONA (Tokyo Overnight Average Rate): For JPY.
- €STR (Euro Short-Term Rate): For EUR.
- SARON (Swiss Average Rate Overnight): For CHF.
Practice MCQs
Q1. With reference to the RBI’s 17 June 2026 move on FCNR(B) and NRE deposits, consider the following statements:
- The interest rate ceiling on FCNR(B) deposits with 3-5 year maturity has been temporarily withdrawn till 30 September 2026.
- Restrictions on interest rates for NRE deposits of 3 years and above have also been removed till 30 September 2026.
- The amendment was issued under Section 35A of the Banking Regulation Act, 1949.
- Transfers from NRO accounts to NRE accounts will also qualify for the exemption.
How many of the above statements are correct?
(a) Only one (b) Only two (c) Only three (d) All four (e) None
(Statement 4 is wrong; NRO-to-NRE transfers will NOT qualify for the exemption.)
Q2. With reference to the FCNR(B) Swap Facility announced on 8 June 2026, consider the following statements:
- The RBI bears the full hedging cost (3-3.5 per cent annually) for banks on eligible FCNR(B) deposits.
- Banks can access the RBI swap facility until 16 October 2026.
- Deposits mobilised under this scheme are exempt from CRR and SLR maintenance.
- The FCNR(B) Swap Facility uses a fixed rate of 1.5 per cent per annum charged to banks.
How many of the above statements are correct?
(a) Only one (b) Only two (c) Only three (d) All four (e) None
(Statement 4 is wrong; the 1.5 per cent fixed rate is for the OFCB Swap Facility for PSUs and banks’ overseas borrowings, NOT the FCNR(B) Swap Facility. Under FCNR(B), RBI bears the full hedging cost.)
Q3. With reference to India’s NRI deposits position (June 2025 data), consider the following statements:
- Total outstanding NRI deposits were USD 168.32 billion in June 2025.
- NRE deposits outstanding were USD 102.75 billion.
- FCNR(B) deposits outstanding were USD 33.58 billion.
- India had no outstanding NRI deposits as of June 2025.
How many of the above statements are correct?
(a) Only one (b) Only two (c) Only three (d) All four (e) None
(Statement 4 is wrong; India had USD 168.32 billion in outstanding NRI deposits.)
Q4. With reference to FCNR(B), NRE, and NRO deposits, consider the following statements:
- FCNR(B) deposits are held in foreign currency without exchange rate risk for the depositor.
- NRE deposits are rupee-denominated with tax-free interest and full repatriation.
- NRO deposits are rupee-denominated for NRIs’ Indian income, with taxable interest and restricted repatriation (USD 1 million per year).
- All three deposit types have unrestricted repatriation.
Which of the above are correct?
(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four
(Statement 4 is wrong; NRO repatriation is restricted to USD 1 million per year.)
Q5. With reference to SBI Research estimates and forex reserves, consider the following statements:
- SBI Research expects USD 40-45 billion inflows via the FCNR(B) route alone.
- Combined inflows from all RBI measures could be USD 55-65 billion in FY27.
- India’s forex reserves were USD 681.61 billion at the end of the week ending 5 June 2026.
- India has never had forex reserves above USD 700 billion.
Which of the above are correct?
(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four
(Statement 4 is wrong; India’s highest-ever forex reserves were USD 728.49 billion; reserves recovered above USD 700 billion in June 2026.)
Answer Key
- (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because NRO-to-NRE transfers don’t qualify.
- (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because the 1.5 per cent is for OFCB, not FCNR(B) swap facility.
- (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because India had USD 168.32 billion NRI deposits.
- (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because NRO repatriation is restricted.
- (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because India’s reserves have crossed USD 700 billion.
