Indian private banks are aggressively raising interest rates and employing digital countdowns to attract Foreign Currency Non-Resident (Bank) (FCNR(B)) deposits as the Reserve Bank of India's crucial swap window unexpectedly closes on August 31, driving a final surge in forex inflows.
Key Points
- Private banks are intensifying efforts to attract FCNR(B) deposits before the RBI's swap window closes on August 31, a month earlier than initially announced.
- Axis Bank and Federal Bank have raised FCNR(B) deposit interest rates to 6.4 per cent for specific tenors and amounts to attract more funds.
- HDFC Bank and ICICI Bank are using website countdown timers to create urgency among non-resident Indian (NRI) customers.
- Banks had mobilised over $52 billion under the scheme by August 13, with experts projecting total mobilisation could reach $60-70 billion.
- The RBI's early closure suggests the scheme has largely achieved its objective of boosting forex reserves and easing external financing risks.
From raising rates to using website countdowns, private banks are pulling out all stops to mobilise foreign currency non-resident (bank), or FCNR (B), deposits before the Reserve Bank of India's (RBI's) swap window closes on August 31.
The swap facility, announced on June 8 to boost stable dollar inflows, was originally available until the end of September.
However, the central bank last week advanced the closure to August-end, citing the "encouraging response" to the facility and the "resultant forex inflows".
Banks Raise Interest Rates
Since then, India's third-largest private sector lender Axis Bank and Federal Bank have raised interest rates on FCNR (B) deposits to 6.4 per cent.
Axis Bank raised the rate on deposits of more than $1 million for the three-to-five-year tenor to 6.4 per cent, effective August 17.
The bank, which was offering 6.25 per cent earlier — up from 6 per cent when the scheme was operationalised — now offers the highest rate among large banks for such deposits.
It continues to offer 6.25 per cent on deposits of less than $1 million.
Federal Bank, too, raised its rate to 6.4 per cent from 6.25 per cent, effective August 17.
It offers 6.4 per cent on US dollar FCNR (B) deposits of $500,000 to less than $3 million for tenors of three to five years.
For deposits of $3 million and above, it offers 6.25 per cent for three years, and 6.4 per cent for four- and five-year tenors.
Digital Countdown and Market Response
Other mid-sized private banks may follow suit and revise their FCNR (B) rates to mobilise as much as possible before the window closes.
HDFC Bank, the country's largest private sector lender, and ICICI Bank, the second-largest, continue to offer 6.25 per cent on these deposits.
State Bank of India (SBI) offers 6 per cent on deposits of more than $1 million for a five-year tenor.
Meanwhile, HDFC Bank and ICICI Bank have put countdown timers on their websites, showing non-resident Indian (NRI) customers the days, hours, minutes and seconds remaining to take advantage of the FCNR (B) rates before the window closes.
Separately, ICICI Bank tapped the overseas bond market to raise $750 million through five-year US dollar-denominated bonds.
Other banks may follow suit to quickly raise dollar funds that could help support the mobilisation of additional FCNR (B) deposits.
"We may do it, we may not do it. We have not decided," said a senior banker at a private bank when asked whether the lender would raise FCNR (B) deposit rates.
"Yes, there is a lot more activity now. Because of the closure, clients also have a sense of urgency.
"People who thought they had time until September 30 are now obviously hurrying things up, so things will certainly move very quickly now," the banker said, adding that teams were working at a much faster pace.
"Everyone would have assumed that the window would remain open until September, but since that is no longer happening and the window is about to close, some banks are raising interest rates to mobilise as much as possible and ensure that some liquidity comes in," said a senior banker at a state-owned bank.
RBI's Rationale for Early Closure
According to the latest RBI data, banks had mobilised more than $52 billion under the scheme as of August 13.
Total mobilisation through FCNR (B) deposits under the swap window could still reach $60-70 billion by August-end, despite the early closure, experts said.
SBI Research has projected FCNR (B) mobilisation of $60-65 billion.
RBI's decision to truncate the window came as a surprise to market participants, particularly after Governor Sanjay Malhotra had indicated in a recent media interaction that there was no intention to close the scheme early.
"The RBI's decision to close the swap window a month early suggests it believes the scheme has largely achieved its objective.
"With inflows already above $ 50 billion and likely to rise further by the end of August, forex reserve buffers have improved while near-term external financing risks have eased.
"At the same time, the underlying BoP picture appears less challenging than previously feared," said Dhiraj Nim and Sanjay Mathur of ANZ, adding that extending the scheme would likely have delivered diminishing returns.
