RBI Swap Window Pushes FCNR Deposit Rates Past 7 Percent

On June 5, 2026, the Reserve Bank of India reopened a swap window for non-resident dollar deposits, and within days, FCNR deposit rates climbed past 7 percent across most major banks. AU Small Finance Bank raised its peak USD rate from 5.15 percent to 7.10 percent on June 10. Equitas Small Finance Bank followed with 7.13 percent on June 18, according to a Reuters wire. Ujjivan Small Finance Bank matched at 7.13 percent. Large private lenders sat far behind: HDFC Bank, ICICI Bank, and Axis Bank all settled at 6 percent, and State Bank of India fell below 6 percent.

The RBI is paying for the spread. By absorbing the full cost of hedging the dollar-rupee swap, the central bank has given banks room to pass on an extra 150 to 200 basis points to depositors. The structure echoes a 2013 program that pulled in $34 billion, though today’s narrower spread between Indian and US rates leaves analysts forecasting a smaller haul.

Why the RBI Reopened the 2013 Playbook

The June 5 monetary policy meeting produced five measures to support the rupee, four of them aimed at different capital flows. The fifth, the FCNR(B) swap window, targets non-resident dollar deposits with the same tool that worked in 2013. The RBI swap window circular issued on June 8 set the operational terms: deposits mobilised between June 8 and September 30, 2026 qualify, with the swap facility itself open until October 16, 2026.

The trigger was the collapse of foreign-currency inflows into the scheme. FCNR(B) deposits had already fallen sharply, from $7.08 billion in FY25 to $946 million in FY26, per the operational circular. With US short-end rates around 4 percent and Indian yields compressed, banks could not offer NRI depositors enough spread to make the dollar trade attractive. The CRR and SLR exemptions the RBI attached to eligible deposits freed balance sheet space, but they did not close the rate gap on their own.

The 2013 version was a crisis tool. Then-governor Raghuram Rajan opened the first FCNR(B) swap window during the taper tantrum, when the rupee was crashing and the current account deficit was widening. The 2026 version is a defensive one: the rupee is weaker, but the system is not in panic. MUFG’s research note on the measures calls the FCNR(B) subsidy the measure with the greatest potential impact for the Indian Rupee, alongside the removal of taxes on foreign holdings of Indian government bonds.

How the Par Swap Window Works

The structure is a par swap, and it transfers currency risk from the bank to the RBI. A bank takes a dollar deposit from an NRI, sells those dollars to the RBI at the FBIL reference rate, and receives rupees to lend in India. At maturity, the bank buys the same dollars back from the RBI at the original rate. Because both legs of the swap are fixed, the bank carries no currency exposure on the deposit itself.

Before the window opened, banks had to buy their own currency hedges on the market, costing roughly 3 percent per year. That cost ate directly into the rate banks could offer. With the RBI now absorbing the expense, banks can pass on 150 to 200 basis points more to depositors. As IDFC First Bank’s 6.75 percent FCNR Plus product page explains in its June note, this is how the lender can offer 6.75 percent on its FCNR Plus USD product.

The RBI has also exempted eligible deposits from the cash reserve ratio and the statutory liquidity ratio. Both ratios force banks to park a slice of every deposit at the RBI or in approved liquid assets. Removing that obligation frees up balance sheet capacity and lowers the bank’s effective cost of funds, on top of the hedge savings.

The mechanics, step by step:

1. An NRI opens a 3-5 year USD FCNR(B) deposit with an authorised dealer bank between June 8 and September 30, 2026.
2. The bank sells the dollar proceeds to the RBI at the FBIL reference rate and receives rupees.
3. The bank lends the rupees in India at domestic rates.
4. At maturity, the bank buys the same amount of dollars back from the RBI at the original rate, returning principal and interest to the NRI in dollars.
5. The RBI absorbs any currency gain or loss. The bank earns the spread between the rupee lending rate and the dollar deposit rate.

Deposits opened under the swap carry a one-year lock-in from the date of opening. After that, early withdrawal is possible at the bank’s discretion and typically with a penalty. Swaps already executed with the RBI cannot be cancelled, even if the depositor walks away.

Small Finance Banks Lead the FCNR Rate Race

The rate war at the top of the table is being won by small finance banks. AU Small Finance Bank moved its peak USD FCNR(B) rate from 5.15 percent to 7.10 percent on June 10, the first of the large revisions. As AU Small Finance Bank’s June 10 rate revision announcement notes, the bank is also the first small finance bank in over a decade to receive in-principle approval from the RBI to transition into a universal bank. Equitas SFB’s 7.13 percent rate hike for NRI dollar deposits, reported by Reuters on June 18, matched Ujjivan Small Finance Bank at the same level. IDFC First Bank sits just below at 6.75 percent through its FCNR Plus product.

Large private and public banks have moved more cautiously. HDFC Bank, ICICI Bank, and Axis Bank all sit at a flat 6 percent across the 3-5 year tenures, up from roughly 3-4 percent before the swap window. State Bank of India ranges from 5.25 percent on 3-year deposits to 6 percent on 5-year deposits up to $1 million. Punjab National Bank is in between, at 6.10 percent across the curve. AU has paired its rate with zero forex margin and zero bank charges on eligible inward and outward remittances, positioning itself as a preferred banking partner for NRIs seeking efficient wealth management and savings solutions in India.

The table summarises the rates as of June 18, 2026. Small finance banks hold the top of the sheet by a wide margin; the gap with the large private trio is visible at a glance. That gap is the visible scoreboard of how much of the RBI subsidy is being passed through to NRI depositors by each lender.

Rates as of June 18, 2026. Confirm current rates with your bank before opening a deposit.

The 2013 Warning Hidden in the New Scheme

The 2013 program worked by the numbers. Banks raised $26 billion through FCNR deposits and another $8 billion through overseas borrowings, for a total of $34 billion. HDFC Bank was the largest single mobiliser at $3.4 billion, followed by ICICI Bank and State Bank of India. The RBI had offered a concessional swap at 3.5 percent per year, roughly 3 percentage points below the prevailing market rate, and banks and depositors responded.

What worked then may not work the same way now. The interest-rate spread that powered the 2013 trade has compressed. Jefferies, as cited in compressed yield spreads versus the 2013 playbook, estimates the gap between Indian and US three-year yields has narrowed to roughly 2.4 percentage points from more than 8 percentage points in 2013. US Treasury yields around 4.5 percent today are roughly four to five times what they were in 2013, when short-end US rates sat near 1-2 percent and Indian three-year government bonds yielded above 9 percent.

The deeper question is whether the new scheme can replicate the leverage trick that defined 2013. Under the previous program, an NRI could contribute a small amount of capital, $100,000, and borrow the rest of the deposit from an offshore lender, with Indian banks issuing standby letters of credit to make the loan possible. At 10-times leverage, that $100,000 became a $1 million FCNR deposit earning 3 percent, against a $900,000 loan at 2 percent, generating 12 percent on the original equity. Some banks offered 19-times leverage, producing 22 percent returns. Prof. Ananth Narayan of SPJIMR, in Why most 2013 FCNR inflows were not NRI money, makes the strongest case that the diaspora narrative understated what really flowed in.

A bulk of the money that came in the form of FCNR(B) deposits during September to November 2013 was not magnanimous NRI money at all. It was overseas bank and institutional money funnelled in as leveraged NRI deposits.

The RBI subsequently asked banks to refrain from offering such leverage structures. Whether the same playbook returns in 2026 will determine whether the new scheme attracts US$20 billion in genuine NRI savings, as MUFG forecasts, or a leveraged mix of diaspora and offshore funding closer to the 2013 mix where bankers say inflows could reach $40 to $50 billion if leverage is permitted.

Reading the Fine Print as an NRI Depositor

For an NRI holding dollars abroad, the appeal of an FCNR(B) deposit is the absence of currency risk. The principal and interest are denominated in the original currency, typically US dollars, and returned in dollars at maturity. There is no rupee conversion at either end. NRE fixed deposits, by contrast, hold rupees; if the rupee depreciates during the term, the dollar value of an NRE FD’s returns falls. FCNR(B) removes that risk by holding the deposit in the original currency throughout. The account is available in five currencies: USD, GBP, EUR, AUD, and SGD.

The lock-in is the trade-off. Any deposit opened under the swap scheme carries a one-year lock-in from the date of opening, and premature withdrawals within that year are not permitted. After year one, banks may allow withdrawal on their own terms, often with a penalty. Swaps already executed with the RBI cannot be cancelled, even if the depositor walks away. With the swap window open only until September 30, 2026, the effective commitment runs well into 2027 for any deposit opened near the deadline.

US-based NRIs face an additional cost most Indian coverage skips. FCNR(B) interest is fully exempt from Indian income tax, and no tax is deducted at source in India. The same interest is taxable in the United States on an accrual basis, even if the NRI has not withdrawn anything. In Investmates’ worked example, a US-based NRI in the 22 percent federal bracket earning 6 percent on $50,000 over five years pays $660 per year in US federal tax on the $3,000 in annual interest, leaving an after-tax return of 4.68 percent. Accounts above $10,000 in aggregate trigger FBAR filing with FinCEN by April 15 the following year, with an automatic extension to October 15, and may require FATCA Form 8938 depending on total foreign assets.

Forecasts for the New FCNR Scheme

MUFG’s research team, in US$20 billion base case for FCNR inflows, puts the base case for the FCNR(B) route alone at US$20 billion in FY 2026/27, with the broader package of RBI measures, including the bond tax removal and the ECB swap facility, bringing total inflows to around US$40 billion. If India is included in the Bloomberg Global Aggregate Index, total could rise above US$50 billion. MUFG has tentatively revised its USD/INR forecast, moving to 94.00 by the September 2026 quarter before rebounding toward 96.00 in the following calendar year. It expects the eventual FCNR(B) quantum to fall short of the 2013 figure on the narrower rate differential.

Brokerages, including Jefferies, see US$40-50 billion as possible if leverage structures return. The range is wide because the deposit scheme’s success depends on whether banks price aggressively enough to attract genuine NRI money in a tighter spread environment, and whether regulators permit the same offshore-leverage playbook that defined 2013. The window closes on September 30, 2026, and absent leverage, the FCNR(B) route alone is unlikely to match the 2013 haul.

Frequently Asked Questions

What is FCNR(B) and who can open one?

FCNR(B) is a fixed deposit held in a foreign currency for non-resident Indians, overseas citizens of India, and persons of Indian origin. Principal and interest are returned in the original currency (USD, GBP, EUR, AUD, or SGD) at maturity, with no rupee conversion. Interest is exempt from Indian income tax and the deposit is fully repatriable.

How does the RBI swap window change the rates on offer?

The swap window, operational from June 8, 2026, lets banks sell the dollar proceeds of new FCNR(B) deposits to the RBI at the FBIL reference rate and reverse the trade at maturity. With the RBI absorbing the currency hedge cost that previously ran at roughly 3 percent per year, banks have been able to raise USD FCNR(B) rates by 150 to 200 basis points.

Can NRIs use leverage to amplify FCNR returns as they did in 2013?

The RBI asked banks to stop facilitating offshore leverage structures after the 2013 program ended. Whether those structures return in 2026 is the central question for the scheme’s inflow scale. Jefferies estimates allowing leverage could push total inflows to US$40-50 billion; MUFG’s base case for the FCNR route alone, without leverage, is US$20 billion.

Are FCNR(B) deposits taxable for US-based NRIs?

FCNR(B) interest is fully exempt from Indian income tax for eligible NRIs, and no Indian tax is deducted at source. The same interest is taxable in the United States on an accrual basis. Accounts above $10,000 in aggregate also require an FBAR filing with FinCEN by April 15 the following year, with an automatic extension to October 15, and may require FATCA Form 8938 depending on total foreign assets.

What happens if I need to withdraw my FCNR(B) deposit early?

Deposits opened under the swap scheme carry a one-year lock-in from the date of opening; premature withdrawal is not permitted within that period. After 12 months, banks may allow withdrawal based on their internal policies, typically with a penalty. Swaps already executed with the RBI cannot be cancelled, even if the depositor walks away.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. FCNR(B) deposits carry currency, interest-rate, and lock-in risks; figures are accurate as of publication and may have changed. Consult a qualified financial advisor and check current rates with your bank before opening a deposit.