Several Indian banks have increased FCNR(B) deposit rates, with some institutions offering yields approaching 6 to 7.1% on US dollar deposits.

Naturally, investors want to know how such rates are possible.

The answer lies in a special support mechanism introduced by the RBI. On June 5, the central bank launched a fixed-rate swap facility at just 1.5% for eligible FCNR(B) deposits. Industry estimates suggest that this provides banks with a benefit of approximately 280 to 300 basis points compared with prevailing market hedging costs.

In effect, the RBI is absorbing a significant portion of the currency hedging expense.

That allows banks to offer more attractive deposit rates while remaining profitable.

Not all banks, however, are offering the same rates.

One of the most common questions I receive is why one institution may offer 5.75% while another offers more than 7%. The answer often lies in funding requirements, treasury positioning, liquidity needs and growth ambitions.

Investors should always understand why a bank is offering a higher rate rather than focusing solely on the rate itself.

The most overlooked aspect of the latest RBI announcement, however, may be its decision to remove restrictions that previously prevented banks from issuing guarantees and letters of credit against FCNR(B) deposits.

This is important because it allows banks to use these deposits as collateral for financing structures.

In practical terms, the RBI has permitted banks to issue guarantees, standby letters of credit and other credit facilities against FCNR(B) deposits, making leverage possible.

The additional return generated in these structures does not come from the deposit itself. It comes from the leverage enabled by the guarantee structure.

This distinction is critical.

A traditional FCNR(B) deposit may be suitable for a conservative investor seeking enhanced US dollar income and protection from rupee depreciation.

A leveraged FCNR(B) strategy built on the same deposit may be suitable only for an aggressive investor with a higher tolerance for complexity, financing risk and liquidity constraints.

The underlying asset remains exactly the same. The risk profile does not.

Investors should also remember that these deposits typically carry maturities of three to five years. This is committed capital, not readily available liquidity. Early redemption may result in reduced interest, breakage costs, penalties or financing unwind expenses where leverage has been used.

Having advised investors through the Global Financial Crisis, the 2013 Taper Tantrum, COVID-19 and multiple interest-rate cycles, one lesson has remained remarkably consistent: attractive opportunities should enhance a portfolio, not dominate it.

FCNR(B) deposits may offer compelling risk-adjusted returns today, but they should remain part of a broader wealth strategy rather than replace one.

The RBI's latest initiative is ultimately not a story about deposits. It is a story about dollars.

India wants to rebuild reserves, support confidence in the rupee and strengthen its external balance sheet by attracting capital from one of its greatest assets the global Indian diaspora.

The opportunity is real. A deposit may be conservative.

A leveraged deposit rarely is.

And in investing, risk is often determined not by what you own, but by how you own it.

Sandeep S. Jadwani

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