The Reserve Bank of India (RBI) on Tuesday issued clarifications on the operational aspects of Foreign Currency Non-Resident Bank (FCNR-B) deposits, addressing queries raised by banks regarding the mobilisation of such deposits and related lending activities. 

The clarification is expected to encourage greater inflows through the FCNR-B route, which could provide support to the rupee in the near term.

According to a document released by the central bank, all Indian banks, including their overseas branches, are permitted to extend loans to non-residents or issue standby letters of credit (SBLCs) in favour of overseas lenders against FCNR-B deposits mobilised by them.

The RBI clarified that banks can also extend loans to FCNR-B account holders and are allowed to mark a lien on such deposits. The move provides greater operational flexibility to banks in raising foreign currency deposits from non-resident Indians.

The central bank further stated that banks will be eligible to undertake foreign exchange swaps with tenors of less than three years, provided they have mobilised fresh eligible FCNR-B deposits with a minimum original maturity of three years under the special scheme.

Under the arrangement, the RBI will offer a plain buy-sell foreign exchange swap facility to banks. The swap support will cover only the principal amount of the deposits and will not include the interest component.

Following the RBI’s announcement of hedging support for fresh three-year and five-year FCNR-B deposits, several public and private sector lenders have increased their deposit rates to attract overseas funds. Banks such as Yes Bank, Canara Bank, South Indian Bank and AU Small Finance Bank have raised FCNR-B deposit rates to as high as 7.1 per cent.

Market participants believe that the higher deposit rates, coupled with the RBI’s swap support and operational clarifications, could encourage non-resident inflows in the coming weeks.

The Indian rupee closed at 94.73 against the US dollar on June 23, compared with 94.69 in the previous trading session. Analysts expect the domestic currency to witness some appreciation in the near term as fresh FCNR-B inflows begin to enter the banking system.