Mumbai: The ‘colour’ of money is set to literally determine how much interest depositors earn, as banks have started rolling out the red carpet for customers overseas. The Reserve Bank of India’s (RBI) latest measures to attract dollar deposits will likely give overseas Indians a better deal than domestic savers. And the move has also split the lenders—those with a higher overseas access are chasing foreign currency deposits, while the smaller lenders rely on domestic deposit rate hikes to attract funds.
Earlier, the central bank capped the interest rate banks could offer on foreign currency non-resident (bank) deposits at a global benchmark rate plus 350 basis points (bps). By nixing the cap this month, it has effectively given banks a free hand to offer higher rates to attract NRI deposits. At least three banks are now paying more for these dollar deposits.
For instance, IDBI Bank offers 6.25% on its domestic fixed deposits for five years, while FCNR(B) deposits fetch 6.5-6.6%. State-owned Union Bank of India offers 6% on domestic FDs against 6.10-6.45% on FCNR(B) deposits for a period of three to five years. Punjab National Bank (PNB) is offering 6.5% for dollar deposits, while paying 6.35% for local funds.
The combined deposit base of IDBI Bank, PNB and Union Bank was ₹33.65 trillion as of March 2026, accounting for nearly 13% of the banking system’s total deposits of ₹262.3 trillion. Expectations are that other lenders could also offer better rates on FCNR deposits as against domestic savers.
Moreover, the interest earned on FCNR deposits is completely tax-free for eligible NRIs. To be sure, there is some tax relief for five-year domestic deposits.
Fixed deposit rates in the three- to five-year brackets at Indian banks were at their lowest in two years last year, per RBI data. Latest available data shows it was at 6.25-6.6% as of July 2025, as against 6.7-7.25% in FY25 and 6.5-7.25% in FY24.
And now, local depositors are earning even less than they did a year ago. The weighted average rate on fresh rupee deposits was 5.77% in April, as against 6.34% in April 2025, RBI data shows.
A potential appreciation of the US currency would only tilt the advantage further in favour of dollar deposits. “Considering the anticipated appreciation of the US dollar, FCNR deposits with maturities of three-five years presently offer a more attractive return proposition than rupee-denominated interest rates,” said P.V. Joy, head of liabilities at Federal Bank.
According to RBI’s June bulletin data, outstanding FCNR(B) deposits were at $33.8 billion at the end of April, while fresh inflows during the month amounted to $166 million. In comparison, total NRI deposits were $165.7 billion, with overall inflows of $764 million in April.
“Generally, the FCNR book is not that high compared to the rupee book,” Joy said. “Even now, we don’t think that will exceed the rupee deposits, but its share will increase slightly.”
The central bank, said an analyst who did not wish to be named, is effectively subsidizing FCNR(B) inflows by taking on the hedging cost. “If the rupee depreciates over the next three to five years, that cost will ultimately be borne by RBI. Some people are questioning why NRIs are being offered a higher effective return while domestic depositors don’t get a similar benefit,” the analyst said.
And there is another development at play in the deposits segment. While lenders with sizable non-resident Indian (NRI) franchises are gearing up to attract dollar deposits, banks with little or no overseas presence, including several small finance banks are again relying on raising domestic deposit rates to mobilize funds.
Unity Small Finance Bank sweetened deposit rates between January and June 2026, raising the one-year retail FD rate by 25 bps to 7.50% and the special 501-day tenor by 105 bps to 7.80%.
Equitas Small Finance Bank also increased rates on select retail fixed deposits this month, raising the 1 year to 18-month rate to 7.10% from 6.90% and the 2-year to 887-day bucket to 7.10% from 7.00%, while retaining its peak FD rate of 7.20% on the 888-day deposit.
Even as small finance banks compete for deposits, the broader impact on the system is likely to be limited. “If you think of it, we are really talking about $40 billion to $60 billion in FCNR deposits and that’s going to mostly come in through the larger scheduled commercial banks,” said Karan Gupta, director and head of financial institutions ratings at India Ratings and Research.
“The small finance banks, even if you take all of them together, are still a very small part of the overall banking sector,” he said. “So, to me, it doesn’t move the needle really because even if they offer higher rates to garner deposits, it is also to keep their LDRs (loan-to-deposit ratio) in check, because they have to continue to grow.”
Gupta believes that the FCNR(B) inflow boost could temporarily ease the pressure on large banks to raise domestic deposit rates.
“If those inflows are strong over the next couple of months, then these large banks can hold back on increasing domestic deposit rates very easily,” he said. “It addresses an immediate problem. Banks get deposits, liquidity comes into the system, everyone is happy.”
The RBI appears keen to closely track the impact of its move to boost dollar deposits. Last week, it directed authorized dealer banks to submit daily data on FCNR(B) deposits, external commercial borrowings (ECBs) and overseas foreign currency borrowings (OFCBs) mobilized under the swap facilities.
Analysts say the expected inflows of $40-60 billion after the RBI's move to boost dollar deposits are underpinned by attractive economics for both depositors and banks.
Rohan Mandora, BFSI research analyst at Equirus Securities, said the appeal of FCNR(B) deposits extends to both sides of the transaction. “For NRIs, this is a very good product because they are getting 6% yield and they can typically borrow eight to nine times in their respective markets at 4-4.5%,” he said.
While the NRIs benefit from the interest rate arbitrage, banks stand to gain from cheaper funding. “Once this scheme got announced, your bulk deposit rate fell by 40-50 basis points,” Mandora said. “There has been a little moderation in deposit rates.”
Even so, analysts caution against overstating the impact.
With India’s banking system holding nearly ₹260 trillion in deposits and adding roughly 10% to its base every year, the scheme is expected to only provide near-term relief on funding costs, rather than materially alter the broader deposit market.