RBI Decision: Major Banks Slash FCNR Interest Rates After Special Swap Window Closes

In a significant development following the Reserve Bank of India's decision to close its special swap window, major Indian commercial banks have moved swiftly to reduce interest rates on Foreign Currency Non-Resident (FCNR) deposits, while this move marks the end of a highly lucrative period for Non-Resident Indians (NRIs) who were benefiting from elevated returns on their dollar-denominated savings. The withdrawal of these benefits comes as banks adjust to the new liquidity environment after the central bank's specialized facility ceased operations on August 31.

Drastic Cuts by HDFC and ICICI Bank

HDFC Bank, India's largest private sector lender, has implemented one of the most substantial reductions in its FCNR deposit rates. The bank has slashed its five-year US Dollar FCNR(B) rate from 6 point 25 percent to 3 point 15 percent. This represents a massive drop of 310 basis points, effectively halving the return for long-term depositors. Following a similar trajectory, ICICI Bank has also reduced its five-year dollar deposit rates by 310 basis points, bringing the interest down from 6 point 00 percent to 2 point 90 percent. These adjustments reflect the immediate impact of the RBI's policy shift on the cost of funds for private lenders.

State Bank of India Adjusts Advantage Scheme

The State Bank of India (SBI), the nation's largest public sector bank, has also revised its rates Notably. Previously, under its 'Advantage Scheme', SBI was offering a return of 5 point 75 percent on deposits up to 10 lakh dollars. This rate has now been reduced by 270 basis points to a regular rate of 3 point 05 percent. For deposits exceeding 10 lakh dollars, where the bank was previously offering 6 percent interest, the rate has seen a cut of 295 basis points, also settling at the 3 point 05 percent mark. These changes signify a uniform approach across the banking sector to normalize rates after the period of aggressive fund mobilization.

The Role of RBI's Special Swap Window

The primary driver behind these fluctuations was the special dollar-rupee swap facility introduced by the Reserve Bank of India on June 8. This window allowed banks to swap foreign currency for Indian rupees at a concessional cost, enabling them to offer higher interest rates to NRI customers to attract foreign capital. The scheme was immensely successful, with Indian banks raising 65 point 4 billion dollars in foreign funds within just 10 weeks. When including overall foreign currency inflows such as overseas borrowings, the total figure reached approximately 73 billion dollars. Due to the overwhelming response and the achievement of targets ahead of schedule, the RBI moved the original deadline of September 30 forward to August 31, leading to the immediate cessation of the premium interest rates offered by banks.

Market Outlook and Liquidity Impact

Sanjay Agarwal, Senior Director at CareEdge Ratings, noted that this scheme provided banks with a vital alternative for foreign currency funding and Importantly improved liquidity within the banking system. While long-term rates for three to five-year deposits have seen sharp declines, short-term rates have remained relatively stable. This indicates that without the support of the RBI's swap window, banks are currently unwilling to pay high premiums for long-term dollar deposits. The massive influx of 65 point 4 billion dollars has fortified the banks' foreign exchange reserves, but the era of exceptionally high returns for NRI depositors has paused for the time being as the market returns to standard pricing models.