The Reserve Bank of India’s (RBI) decision to relax rules governing Foreign Currency Non-Resident (Bank), or FCNR(B), deposits has opened a new avenue for Non-Resident Indians (NRIs) seeking higher returns while protecting their savings from currency fluctuations.
The temporary relaxation, which remains in force until September 30, 2026, allows banks greater flexibility to raise foreign-currency deposits from NRIs at a time when global interest rates remain elevated, and the Indian rupee faces pressure from volatile oil prices and uncertain global economic conditions.
The move has triggered considerable interest among NRIs, particularly in the Gulf region, where a large proportion of expatriate Indians earn and save in US dollar-linked currencies. With FCNR(B) deposit rates becoming increasingly attractive, many are reassessing whether funds currently parked in Non-Resident External (NRE) or Non-Resident Ordinary (NRO) accounts should be shifted into FCNR(B) deposits.
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The RBI’s latest initiative is widely viewed as a strategic effort to boost foreign-currency inflows into the banking system while strengthening India’s external sector. In addition to removing interest-rate caps on select FCNR(B) and NRE deposits, the central bank has agreed to absorb the hedging costs associated with fresh three- to five-year FCNR(B) deposits mobilised by banks.
The measure significantly improves the economics of attracting overseas deposits and allows banks to offer more competitive returns to NRIs.
The timing is notable. RBI data show FCNR(B) inflows have slowed sharply over the past year, prompting policymakers to revive a strategy similar to the successful 2013 FCNR mobilisation programme, which helped stabilise the rupee during a period of market turbulence.
Bankers expect the latest initiative to generate substantial inflows. Ashok Chandra, Managing Director and Chief Executive Officer of Punjab National Bank, recently estimated that Indian banks could collectively mobilise between $35 billion and $40 billion under the scheme. Other lenders have projected inflows of $20 billion to $30 billion, while some analysts believe the figure could exceed $50 billion if banks aggressively market the product.
For NRIs, the attraction lies in the unique characteristics of FCNR(B) deposits.
Unlike NRE deposits, which are maintained in Indian rupees, FCNR(B) deposits are held in designated foreign currencies such as the US dollar, pound sterling, euro, Japanese yen, Australian dollar and Canadian dollar. This shields depositors from any depreciation of the rupee during the investment tenure while ensuring full repatriability of both principal and interest.
Historically, NRE deposits offered significantly higher interest rates to compensate investors for currency risk. However, the gap between NRE and FCNR(B) returns has narrowed considerably as global interest rates have remained elevated. Several Indian banks are now offering more than 7 per cent on dollar-denominated FCNR(B) deposits, a level rarely seen in recent years.
According to Vishal Lohia, Partner at Dhruva Advisors, the current environment presents a compelling opportunity for NRIs who anticipate future financial commitments outside India.
“Shifting from NRE to FCNR(B) is a seamless transfer. Historically, NRE rupee deposits offered higher rates to compensate for the risk of Indian rupee depreciation. NRIs may prefer to convert NRE balances to FCNR(B) to lock in the three- to five-year high dollar yields without carrying any exchange-rate risk,” Lohia said.
The argument becomes even stronger for NRO account holders.
Interest earned on NRO deposits is generally taxable in India, often resulting in an effective tax burden of around 30 per cent, excluding surcharge and cess. In contrast, interest income earned on FCNR(B) deposits remains exempt from Indian income tax for eligible NRIs.
Lohia described this as a potentially significant tax advantage.
“Shifting from NRO to FCNR(B) offers a massive tax arbitrage but requires procedural compliance. While moving funds from an NRO to an FCNR(B) account requires utilising the $1 million annual repatriation route via an NRE account and meeting certain remittance-related tax requirements, the post-tax returns generated by the FCNR(B) yield may make the compliance effort worthwhile,” he said.
However, experts caution against viewing FCNR(B) deposits as a universal replacement for traditional NRI banking products.
Salee Nair, Managing Director and Chief Executive Officer of Tamilnad Mercantile Bank, said NRE, NRO and FCNR(B) deposits are designed to serve different financial objectives and should be viewed as complementary rather than competing products.
“We do not believe this should be viewed as an either-or decision. NRE, NRO and FCNR deposits serve different financial objectives and can complement each other within an NRI’s portfolio,” Nair said.
Financial advisers broadly agree. They note that NRIs who expect to spend or invest most of their savings in India may still benefit from maintaining a substantial allocation to NRE deposits, particularly when rupee interest rates remain attractive. At the same time, those with future overseas commitments, such as children’s education, retirement planning, or property purchases abroad, may find FCNR(B) deposits better suited to their needs.
Some market experts also warn investors against chasing higher returns through leveraged strategies involving FCNR(B) deposits. While the current rate environment is attractive, borrowing costs, liquidity requirements and future interest-rate movements can quickly alter the risk-reward equation.
Overall, economists view the RBI’s FCNR(B) relaxation as a win-win measure. For India, it strengthens foreign exchange reserves, supports the rupee and improves resilience against external shocks. For NRIs, particularly those in the Gulf, it offers a rare combination of attractive dollar yields, tax efficiency and protection from currency volatility.
The RBI’s temporary window has undoubtedly enhanced the appeal of FCNR(B) deposits. Yet experts stress that the decision to switch funds from NRE or NRO accounts should not be driven by interest rates alone. Instead, it should be based on an individual’s financial goals, tax profile, currency exposure and future spending requirements.
For many NRIs, the central bank’s latest move is less about choosing one deposit product over another and more about creating an opportunity to optimise their savings strategy in an increasingly uncertain global financial environment.
