Context:
Indian banks are showing caution in raising foreign currency denominated deposit rates, despite the Reserve Bank of India (RBI) offering greater flexibility to boost overseas capital inflows.
Foreign Currency Deposits
Foreign currency deposits, like those under schemes such as FCNR (Foreign Currency Non-Resident), allow individuals to invest in fixed deposits denominated in foreign currencies, offering potential for higher returns and protection from exchange rate fluctuations.
Key Reasons for Caution
- Cheaper sourcing from global markets:
- Banks are increasingly raising funds through syndication loans and global borrowings at competitive rates, making FCNR-B deposits less attractive.
- “Softening interest rates in global markets have made it easier for domestic banks to raise US dollar funds,” said Ajay Kumar Srivastava, MD, Indian Overseas Bank.
- Static demand for foreign currency loans:
- Domestic demand for foreign currency loans remains flat, reducing banks’ incentive to raise FCNR-B deposit rates.
- Karur Vysya Bank MD, B Ramesh Babu, noted that the bank prefers alternative, cost-effective funding sources.
Inflow Data & Market Behavior
- FCNR-B deposit inflows remain subdued:
- In December 2024, banks recorded just $58 million in FCNR-B deposit inflows.
- Combined inflows for December and January were $612 million, down from $960 million in the preceding two months.
- Peak inflows of $1.876 billion were recorded in September 2024.
- Rate adjustments have been minimal:
- Banks such as Indian Overseas Bank have kept FCNR-B deposit rates unchanged since October 2024.
- CSB Bank MD, Pralay Mondal, stated that current inflows sufficiently meet their foreign currency loan requirements.
RBI’s Measures and Impact
- In December 2024, the RBI raised the ceiling on FCNR-B deposit rates by 150 basis points to encourage capital inflows.
- This regulatory relaxation is effective until March 31, 2025.
- Mixed response from banks:
- Federal Bank’s Executive Director, Shalini Warrior, mentioned steady growth from existing customers using FCNR-B deposits to hedge foreign currency risks.
- However, banks have not aggressively raised rates, focusing instead on cheaper foreign borrowing avenues and existing stable demand.
Despite the RBI’s efforts to enhance foreign currency inflows through relaxed FCNR-B deposit rate caps, Indian banks continue to favor cheaper international funding sources and remain cautious due to static corporate demand for foreign currency loans. The trend suggests modest growth in FCNR-B deposits, with limited rate hikes in the near term unless market conditions change significantly.
Source: TET
