The Reserve Bank of India will bear the full hedging cost on fresh FCNR(B) deposits to attract Non-Resident Indian investors [1].
This move is designed to lower the cost for Indian banks to raise foreign-currency deposits. By removing the hedging burden from banks, the central bank intends to strengthen foreign-exchange reserves and provide support to the rupee amid market pressure [1], [2].
Under the current measure, the RBI will absorb these costs for fresh deposits made until Sept. 30, 2024 [1]. The initiative targets a significant increase in liquidity, with expected foreign-currency inflows of over $10 billion [2].
Industry leaders expect the subsidy to stimulate growth in the sector. "It will be a game-changer for foreign-currency deposit growth," P. D. Singh, chief executive officer of the Banking Division, said [2].
While the RBI has implemented this specific measure, some banking officials have pushed for broader support. Banks have suggested subsidizing hedging costs to attract between $30 billion and $50 billion of foreign exchange [3].
The FCNR(B) account allows NRIs to maintain deposits in foreign currencies, protecting them from exchange rate fluctuations. Previously, banks bore the risk and cost of hedging these funds, a factor that often limited the competitiveness of the rates offered to investors [1].
“"It will be a game-changer for foreign-currency deposit growth,"”
By absorbing hedging costs, the RBI is effectively subsidizing the risk that banks take when accepting foreign currency. This strategy allows banks to offer more attractive interest rates to NRIs without sacrificing their own margins. If successful, the resulting influx of dollars will provide the RBI with a larger buffer to manage volatility in the Indian rupee and stabilize the broader economy.
