Foreign banks’ increased demand for FCNR(B) deposits through RBI’s swap facility has driven a surge into 3- to 5-year government securities, lowering yields and widening the gap with 10-year bonds amidst evolving regulatory support.
Foreign banks in India are directing a surge of FCNR(B) money into 3-year to 5-year government securities, a shift that has pushed down shorter-dated yields and widened the gap with the 10-year bond, according to market reporting. The move has gathered pace through August as banks look for low-risk places to park foreign currency deposits while a series of regulatory incentives remain in force.
The Reserve Bank of India set the tone in June with a dollar-rupee swap facility for fresh FCNR(B) deposits of 3 years to 5 years, designed to cut hedging costs for banks and make the deposits more attractive to non-resident Indians. The window is open for money mobilised between June 8 and September 30, 2026, and deposits carry a one-year lock-in. On August 7, the central bank also exempted fresh advances against FCNR(B) and NRE term deposits from priority sector lending requirements, reducing one more incentive to push those funds into conventional loan books.
The scale of the inflows has been notable. Reporting from LiveMint said banks had raised more than $17 billion through the concessional deposit scheme after the June mobilisation drive began, with expectations that total inflows could eventually reach between $45 billion and $55 billion. That would exceed the $26 billion raised in 2013, underscoring how aggressively foreign banks are competing for this pool of deposits.
For bond markets, the immediate effect has been heavier demand for 3-year to 5-year paper, which has pulled yields lower relative to the 10-year benchmark. HSBC and other foreign lenders have been among the active participants, using the RBI’s swap support to manage currency risk while putting money into sovereign debt rather than expanding lending where they lack the same branch reach as domestic banks. Analysts are also watching for a potential cliff edge when the swap window closes on September 30, because the flow of deposits and the demand for short-dated government bonds could quickly change if the facility is not extended.
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