Bandhan Bank hikes FCNR rates to 7.1% after RBI swap

Bandhan Bank raised interest rates on US dollar-denominated FCNR(B) deposits Friday. Deposits of $1 million or more now earn 7.1% for tenors of three to five years. Smaller deposits pay 7%. The bank said the revision follows the RBI's decision to offer banks a USD-INR forex swap on fresh FCNR(B) deposits of at least three years.

Here is how the swap works. A bank collects dollars from NRIs through the FCNR deposit. It then swaps those dollars with the RBI for rupees at a fixed forward rate. That forward hedge eliminates the exchange-rate risk on the deposit, so the bank can offer a higher interest rate without exposing its balance sheet to rupee depreciation. The RBI keeps the dollars, adding to forex reserves, while the rupee proceeds go to the banking system.

The move solves two problems for the RBI. It draws foreign currency inflows into the formal system, and it supplies rupee liquidity without an open-market bond purchase. Both channels support the rupee at a time when the currency has been under pressure. For a broader view on the rupee and dollar dynamics, traders can review the forex market analysis.

"We are pleased to introduce this attractive FCNR(B) deposit offering for our NRI customers at a time when they are seeking stability and value in their overseas investments," said Rajinder Kumar Babbar, Bandhan executive director and chief business officer. He said the offering lets NRIs lock in competitive returns for a longer duration while mitigating currency risk.

The RBI's swap facility is open for deposits with a minimum three-year tenor and a maximum of five years. The central bank said it introduced the facility to encourage foreign currency inflows into the domestic banking system and ease pressure on liquidity.