This relaxation, effective until September 30, 2026, allows banks to offer rates up to 7.10% on dollar deposits compared to the previous 3.5-4.0% range.
The move comes when NRI dollar deposit inflows have collapsed to under $1 billion in FY26, down from $7 billion in FY25, and India's forex reserves have declined from a peak of $728.5 billion to approximately $681.6 billion. The RBI's swap window absorbs the 2-3% annual hedging cost that banks typically bear, making FCNR(B) deposits a more attractive funding source.
For HDFC Bank and ICICI Bank, the regulatory removal creates a meaningful cost advantage. The effective cost of FCNR(B) deposits after accounting for tax exemptions, CRR/SLR exemptions, and zero hedging costs could be 50-100 basis points lower than comparable domestic deposits.
HDFC Bank's overall cost of funds has already declined from 4.9% in Q3 FY24 to 4.4% in Q4 FY26, while ICICI Bank maintains a healthy net interest margin of 4.32%. The temporary window allows both banks to replace higher-cost wholesale funding—HDFC Bank's borrowing mix stands at 16% post-merger, down from 21%, with a target of returning to 7-8% historical levels. InvestorPresentations +1
The key question is whether they can mobilize significant deposits without compressing margins. Given that domestic 1-year FD rates hover around 6.25%, offering 6.00% on 3-5 year FCNR(B) deposits with tax benefits and zero currency risk creates a compelling value proposition for NRIs while maintaining healthy spreads.
Banks with established NRI franchises possess significant advantages.
Their competitive edge stems from extensive distribution networks, mature digital platforms, and strong brand recognition among NRIs.
However, the RBI's stipulation that NRE/NRO deposit rates cannot exceed comparable domestic rupee term deposits limits pricing flexibility. This constraint forces competition to shift from rate-based differentiation to service quality, digital capabilities, and relationship banking.
Smaller banks like AU Small Finance Bank are offering aggressive rates of 7.10%, but established players like HDFC Bank and ICICI Bank are betting on their comprehensive service offerings, cross-selling capabilities, and lower counterparty risk perception to attract quality deposits.
The temporary relaxation enables HDFC Bank and ICICI Bank to strengthen liquidity positions significantly. Both banks maintain healthy liquidity coverage ratios—HDFC Bank at 128% and ICICI Bank at 126%—providing ample room to redirect funds toward loan growth rather than low-yielding liquid investments. Transcripts +1
For public sector banks like State Bank of India, the 3-5 year maturity profile aligns perfectly with asset-liability management strategies. SBI faces the classic challenge of funding long-gestation infrastructure assets with short-term deposits. The Economic Survey 2026 explicitly recognizes the limits of using short-term deposits to fund long-term infrastructure projects.
The longer tenor reduces rollover risk and enhances stability.
This addresses the sharp 2016 redemption cycle problem from the previous scheme.
The potential increase in low-cost NRI deposits could drive net interest income enhancement of ₹750-2,000 crore annually, depending on mobilization success. For banks that successfully execute, the ROA impact could be 3-4 basis points in the near term, with sustained benefits over the deposit tenor.
Current valuations reflect varying expectations.
ICICI Bank commands premium valuations (P/E 16.55, P/B 2.69) with stable NIMs. SBI has been the outperformer with +31.6% 1-year returns but trades at lower multiples (P/E 10.93, P/B 1.69).
Analysts at Jefferies expect HDFC Bank to be the largest beneficiary again, given its extensive overseas customer base and established NRI deposit franchise. The market is pricing in moderate NRI deposit potential, with strong buy consensus across all three major banks.
The RBI's swap window fundamentally transforms foreign exchange risk exposure. Under the traditional structure, banks bore currency risk when converting dollar deposits to rupees for deployment. The new mechanism transfers this risk to the RBI through par swaps, eliminating the 2-3% annual hedging cost.
For ICICI Bank, which reported a net treasury loss of ₹106 crore in Q4 FY26 due to mark-to-market impacts on outstanding forwards, the swap window provides significant relief. HDFC Bank, with limited current FX exposure, gains a clean slate for FCNR expansion. Transcripts +1
Increased FCNR(B) inflows could ease pressure on the Indian rupee, which has depreciated approximately 6% year-to-date against the US dollar. Analysts estimate the combined RBI measures could attract $40-60 billion in foreign currency inflows by September 2026, potentially strengthening USD/INR to 94.00 by the September quarter before normalizing.
The current environment differs significantly from 2013. US Treasury yields hover around 4.5%, narrowing the interest rate advantage India can offer.
Today, the spread has compressed to 150-260 basis points at best.
This compression reduces the arbitrage opportunity that drove 2013 inflows. At current US borrowing costs of approximately 4.5%, the carry trade economics simply do not support borrowing to invest in FCNR(B) deposits at 7%. Rates of 8-8.5% may be needed to trigger the same scale of inflows as 2013.
However, HDFC Bank and ICICI Bank can leverage their international presence and digital capabilities to compete effectively. HDFC Bank offers FCNR deposits in six currencies (USD, SGD, GBP, EUR, JPY, AUD, CAD), while ICICI Bank's iMobile Global app provides seamless cross-border banking. Transcripts
The September 30, 2026 deadline creates urgency but also uncertainty. Banks must balance aggressive deposit mobilization with customer retention strategies to convert temporary depositors into long-term relationships.
For State Bank of India, the conservative approach leveraging government backing and extensive network makes sense. IndusInd Bank, with its higher risk appetite and niche positioning, may pursue more aggressive market penetration during the relaxation period.
The key risk is the potential redemption pressure when the scheme ends. However, the 3-5 year deposit tenor provides sustained benefits that extend well beyond the regulatory window. Banks that successfully navigate this opportunity will strengthen their external sector resilience and build lasting NRI relationships.
The RBI's temporary relaxation of interest rate caps on FCNR(B) and NRE deposits presents a significant opportunity for Indian banks to strengthen liquidity, reduce funding costs, and improve asset-liability management. HDFC Bank and ICICI Bank are well-positioned to leverage their NRI franchises without materially compressing margins, while public sector banks gain much-needed tenor matching for infrastructure lending.
The success of this initiative will depend on execution risk, global interest rate movements, and the ability to convert temporary regulatory relief into sustainable competitive advantages. Banks that navigate these challenges effectively could see 15-20% stock appreciation and sustained earnings growth over the medium term, while strengthening India's external sector stability in the process.
