Brokerages said the RBI's decision to absorb the entire hedging cost has significantly improved the economics of FCNR(B) deposits, allowing both banks and depositors to benefit from the arrangement.
"Customers can earn 15-26 per cent returns on such leveraged deposits, while banks will earn around 65 basis points higher spreads by deploying these deposits, making it a win-win proposition for everyone," Motilal Oswal said in a report.
The brokerage estimates are based on investors borrowing against their FCNR(B) deposits and using leverage to amplify returns, a strategy that gained popularity during the RBI's 2013 FCNR(B) mobilisation programme.
Jefferies said the RBI is open to banks providing standby letters of credit (SBLCs) to lenders financing deposit customers, allowing investors to leverage their capital. "With 7-10x leverage and a spread of 1.5-2 per cent, customers can generate 17-27 per cent US dollar IRR annually over three to five years," the brokerage said.
The potential returns are expected to make FCNR(B) deposits attractive despite global dollar interest rates remaining significantly higher than they were in 2013.
According to Macquarie Research, banks including HDFC Bank, ICICI Bank and Kotak Mahindra Bank are currently offering around 6 per cent on three-year FCNR(B) dollar deposits. "If you assume a 5x leverage then 12 per cent is what you make annually. At 9x leverage you may make 17 per cent," the brokerage said, while noting that not all investors may be able to obtain such high levels of leverage.
The RBI last week allowed banks to mobilise FCNR(B) deposits without maintaining the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements on such funds until March 2027. It also opened a special swap window under which banks can swap FCNR(B) dollar deposits with the RBI at a fixed rate of 1.5 per cent for up to three years.
Analysts estimate the measures could attract between $30 billion and $60 billion of deposits from NRIs. Even at the upper end, the inflows would account for only around 2 per cent of the banking system's deposit base, limiting the impact on overall funding costs.
Macquarie noted that loan growth is currently running at around 16 per cent year-on-year while deposit growth is closer to 12 per cent, leaving a gap of roughly 400 basis points. "The bigger benefit is that you get deposit flow to deploy," the brokerage said, adding that FCNR(B) inflows could help bridge part of the gap.
The current scheme bears similarities to the FCNR(B) deposit mobilisation programme introduced in 2013, when the RBI offered a concessional swap facility to stabilise the rupee and rebuild foreign exchange reserves. That programme attracted more than $34 billion of deposits.
While the interest rate environment has changed considerably since then, Nomura believes the economics remain favourable. "The 2013 FCNR(B) scheme was a big success due to low USD rates globally as well as the leverage provided by banks to NRIs, which increased annual returns to the high teens," the brokerage said.
"Today, USD rates are much higher, but with the RBI assuming the full hedging cost, USD deposits will be attractive to banks provided they can raise money at a lower rate than INR deposits of similar maturity," Nomura added.
Most banks are currently offering around 6 per cent on three-year FCNR(B) deposits compared with roughly 6.4-6.5 per cent on comparable domestic fixed deposits. Several lenders, including State Bank of India, HDFC Bank, Kotak Mahindra Bank and a number of smaller banks, have raised FCNR(B) deposit rates in recent days as they compete for a share of the expected inflows.
 "foreign currency dollar")