NRIs in UAE: Should you move US dollars to India? Banks now offer up to 7.5%

Dubai: If you're an Indian living in the UAE and have savings in US dollars, you've probably noticed something unusual. Several Indian banks are advertising returns of up to 7.5% on certain US dollar fixed deposits for non-resident Indians (NRIs).

The rates are among the highest seen in years and have sparked interest across one of the world's largest Indian expatriate communities. So, should you move your dollars? How do these deposits work? And why is India suddenly trying to attract billions of dollars from overseas Indians?

The answer lies in a special programme launched by the Reserve Bank of India (RBI) last month to encourage foreign currency deposits and strengthen the country's foreign exchange reserves.

The new interest rates are eye-catching, but the headline figure is only one part of the picture. Whether an FCNR(B) deposit is suitable depends on factors including the currency you want to keep your savings in, the deposit tenure, liquidity needs, early withdrawal conditions and the product offered by your bank.

The RBI's initiative has made these deposits more attractive by allowing banks to offer higher returns, but it does not mean every depositor will automatically benefit from moving funds.

Before opening any foreign currency deposit, customers should understand the account's terms and conditions, including its maturity period, eligibility requirements, tax treatment and repatriation rules.

The deposits attracting attention are FCNR(B) or Foreign Currency Non-Resident Bank deposits. Unlike a conventional NRE fixed deposit, where foreign currency is converted into Indian rupees, an FCNR(B) deposit remains in a foreign currency such as the US dollar throughout its tenure.

That means both the principal and the interest remain in the chosen foreign currency, reducing exposure to movements in the rupee during the deposit period.

For most UAE-based NRIs who already hold US dollars in a UAE bank account, the funds can generally be remitted directly to an FCNR(B) account with an eligible Indian bank, subject to the bank's procedures and RBI regulations.

Existing balances in eligible NRE accounts may also be converted into FCNR(B) deposits, depending on the bank's policies and applicable RBI rules. The enhanced rates currently being advertised apply to fresh eligible deposits with maturities of three to five years under the RBI's special programme.

The unusually high rates are not simply the result of competition between banks. Under the RBI programme announced in June, the central bank is covering the hedging costs that banks normally incur when they accept eligible foreign currency deposits.

Banks usually spend money protecting themselves against fluctuations in exchange rates. Those costs reduce the returns they can offer depositors. By absorbing those costs, the RBI has given banks room to offer significantly higher interest rates.

The central bank has also allowed banks to borrow against eligible foreign currency deposits, making the programme more attractive from a funding perspective.

The initiative is part of a broader effort to strengthen India's foreign exchange reserves and support the rupee. Foreign exchange reserves are held by central banks to help pay for imports, meet external debt obligations, support the domestic currency during periods of market volatility and reassure investors about a country's financial strength.

India already holds one of the world's largest foreign exchange reserves, but policymakers are looking to strengthen that position as the rupee faces pressure from higher oil prices, global market uncertainty and changing capital flows.

Alongside the foreign currency deposit scheme, the RBI has introduced concessional foreign exchange swaps and widened access for overseas investors to certain Indian bonds. The Indian government has also reduced capital gains tax on debt investments by foreign funds.

Analysts estimate the combined measures could attract between $30 billion and $50 billion this year. DBS Bank estimates the initiative alone could bring in $30 billion to $40 billion, while bankers expect it could eventually mobilise around $50 billion. Jefferies estimates inflows could reach $60 billion to $80 billion if banks further increase deposit rates.

The UAE has become one of India's most important overseas financial markets. Millions of Indians live and work across the Emirates, making it one of the world's largest Indian expatriate communities and one of India's biggest sources of remittances.

The region also accounts for roughly one-fifth of all remittances sent to India. That makes the UAE a natural destination for Indian banks seeking fresh US dollar deposits.

Banks have launched campaigns targeting the global Indian diaspora, while Finance Minister Nirmala Sitharaman has urged state-owned lenders to strengthen engagement with non-resident Indians.

RBI Governor Sanjay Malhotra has also met executives from state-run and selected private banks to discuss the industry's progress.

The latest development came last week, when officials from the RBI and the Central Bank of the UAE met in Dubai to discuss issues related to the programme, according to Bloomberg, citing people familiar with the discussions.

Bloomberg reported that the UAE regulator raised concerns that banks operating in Dubai's financial free zones should continue prioritising local customers while supporting India's overseas fundraising efforts.

Officials also discussed ways to streamline due diligence processes carried out by UAE-based banks for wealthy customers opening eligible deposit accounts, according to the report.

Bloomberg further reported that, amid heightened geopolitical tensions in the Middle East, some smaller banks had been cautioned against offering aggressive leverage to Indian lenders because of concerns over excessive capital outflows.

The discussions were private, and neither central bank has publicly commented on the reported meetings.

Not directly. The reported discussions relate to banks raising longer-term foreign currency deposits rather than day-to-day money transfers. For most UAE-based Indians, remittance services continue to operate as normal.

Instead, the talks reflect the operational coordination needed as Indian banks expand efforts to attract foreign currency deposits from one of their most important overseas markets.

India has turned to overseas Indians before during periods of pressure on the rupee. In 2013, during the "taper tantrum", Indian banks raised about $34 billion from overseas Indians to help stabilise the currency.

The current programme follows a similar approach but on a potentially larger scale. With estimates ranging from $30 billion to as much as $80 billion in potential inflows, overseas Indians—particularly those living in the UAE—are once again at the centre of one of India's biggest foreign currency fundraising efforts in more than a decade.