Foreign currency inflows mobilised through the Reserve Bank of India’s concessional FCNR(B) swap window are increasingly finding their way into Indian government securities, particularly five-year government bonds, as banks look for relatively low-risk avenues to deploy the additional rupee liquidity.
The shift has made the five-year government bond one of the strongest performers in the sovereign debt market since June. Foreign banks, which have relatively smaller lending books than large domestic banks, have emerged as some of the biggest buyers of three- to five-year government securities. Their buying has pushed shorter-term bond yields lower and changed the shape of India’s government bond yield curve.
Why five-year government bonds are attracting banks
Banks receiving large FCNR(B) deposits effectively get additional rupee liquidity after using the RBI’s concessional foreign-exchange swap facility.
The problem for some foreign banks is that they do not have sufficiently large retail and corporate loan books to deploy this money quickly.
Government bonds provide an alternative.
FCNR(B) deposits
↓
RBI concessional FX swap
↓
Banks receive rupee liquidity
↓
Limited immediate loan demand
↓
Banks buy government securities
↓
Strong demand for 3–5 year G-Secs
↓
Bond prices rise
↓
Yields fall
Business Standard reports that foreign banks had mobilised more than $8 billion of FCNR(B) deposits by the end of July, with HSBC alone accounting for more than $6 billion.
Five-year bond yields outperform 10-year bonds
The impact is particularly visible in the five-year segment.
Since June 1, the five-year government bond yield has fallen more sharply than the 10-year benchmark yield. As a result, the spread between the two maturities widened from 19 basis points to as much as 46 basis points last week. It stood at 41 basis points on Monday.
The spread between the 10-year benchmark and three-year bond also widened to 57 basis points, compared with 45 basis points on June 1.
| Government bond segment | Spread / movement |
|---|---|
| 5-year vs 10-year spread on June 1 | 19 bps |
| Peak 5-year vs 10-year spread | 46 bps |
| Current 5-year vs 10-year spread | 41 bps |
| 3-year vs 10-year spread on June 1 | 45 bps |
| Current 3-year vs 10-year spread | 57 bps |
BOND YIELD CURVE EFFECT
June 1
5Y ─────────────── 10Y
19 bps
Recent peak
5Y ───────────────────────── 10Y
46 bps
Current
5Y ─────────────────────── 10Y
41 bps
The widening spread shows that the buying pressure is concentrated more heavily in shorter and intermediate maturities rather than across the entire government bond market.
$40.82 billion has already flowed through the facilities
The scale of the capital movement is significant.
According to RBI data cited by Business Standard, total inflows under the relevant facilities reached $40.82 billion as of July 31, almost doubling from $20.72 billion on July 17.
| Facility | Inflows as of July 31 |
|---|---|
| FCNR(B) deposits | $36.73 billion |
| Overseas foreign currency borrowings | $2.58 billion |
| External commercial borrowings | $1.52 billion |
| Total | $40.82 billion |
TOTAL INFLOWS
$40.82 BILLION
FCNR(B)
$36.73B
██████████████████████████████████
Overseas FX borrowings
$2.58B
██
ECB
$1.52B
█
FCNR(B) deposits therefore account for the overwhelming majority of the inflows under the facilities.
FCNR(B) deposits are driving the liquidity surge
The RBI introduced the concessional forex swap facility to encourage banks to mobilise fresh Foreign Currency Non-Resident (Bank), or FCNR(B), deposits.
The facility applies to eligible fresh deposits with a tenure of three to five years. The mobilisation window runs through September 30, 2026.
The basic mechanism is:
NRI / FCNR(B) depositor
↓
Foreign currency deposited
↓
Indian bank
↓
RBI concessional FX swap
↓
Bank receives rupee liquidity
↓
Loan deployment / G-Sec investment
The policy effectively reduces the currency-hedging burden for banks, making it more attractive for them to raise longer-duration FCNR(B) deposits.
Why foreign banks are buying bonds
Foreign banks are particularly active in the government bond market because their lending capacity in India is generally smaller than that of large domestic banks.
When substantial FCNR(B) deposits arrive, these banks have two broad choices:
Deploy the funds through loans
or
Invest the liquidity in financial assets such as government securities.
If loan demand cannot absorb the money quickly enough, government bonds become an attractive alternative.
FOREIGN BANK
FCNR(B) inflow
↓
Large liquidity
↓
Can loans absorb it?
↓
NO
↓
Government bonds
↓
3–5 year G-Secs
This is one of the main reasons the five-year segment has experienced stronger demand.
Why banks prefer three- to five-year bonds
Banks are also being cautious about taking excessive duration risk.
Longer-duration bonds are more sensitive to changes in interest rates. If yields rise, the prices of longer-maturity bonds can fall more sharply.
Three- to five-year securities provide a middle ground:
- Higher duration than very short-term assets
- Lower interest-rate sensitivity than 10-year or longer bonds
- Relatively strong liquidity
- Sovereign credit quality
- Suitable for deploying temporary excess liquidity
DURATION RISK
Short-term
↓
Low risk
3–5 year
↓
Moderate risk
↓
CURRENT BANK PREFERENCE
10-year+
↓
Higher duration sensitivity
↓
Banks more cautious
Business Standard reports that dealers expect immediate deployment to remain concentrated in the three- to five-year segment as banks assess credit demand before committing to longer-duration assets.
India’s banking system already has surplus liquidity
FCNR(B) inflows are arriving at a time when India’s banking system is already holding substantial excess liquidity.
Funds parked with the RBI’s liquidity adjustment facility have remained above ₹3 trillion in recent days, according to the report.
That creates another reason for banks to purchase government securities.
FCNR(B) INFLOWS
+
Existing surplus liquidity
↓
More funds available
↓
Banks need deployment avenues
↓
G-Secs become attractive
The combination of these two liquidity sources is increasing demand for shorter and intermediate government bonds.
Banks are also reducing reliance on costly deposits
Another effect of the additional liquidity is appearing in the deposit market.
Private and state-owned banks are using part of their surplus funds to replace costly bulk deposits raised earlier at higher rates.
This could reduce banks’ funding costs.
Earlier
High-cost bulk deposits
↓
Higher funding cost
Now
FCNR(B) inflows
+
Surplus liquidity
↓
Less dependence on expensive deposits
↓
Potentially lower funding cost
The effect is also spilling into the certificate of deposit (CD) market, where rates have declined as banks become less dependent on CDs for funding.
SBI expects relief for bulk deposit pricing
State Bank of India Chairman C S Setty said the liquidity generated by FCNR(B) inflows should ease pressure on bulk deposit pricing across the banking system.
Banks that attract more FCNR(B) deposits may have less need to aggressively price bulk deposits to attract domestic funding.
This creates a potential chain reaction:
FCNR(B) inflows
↓
More bank liquidity
↓
Lower dependence on bulk deposits
↓
Less aggressive deposit rates
↓
Lower funding pressure
↓
Potential improvement in bank margins
However, the benefit will not be evenly distributed because FCNR(B) mobilisation has varied significantly between banks.
HSBC has emerged as the biggest mobiliser
Foreign banks have been particularly successful in attracting FCNR(B) deposits.
HSBC alone had mobilised more than $6 billion by the end of July, according to market participants cited by Business Standard.
FOREIGN BANK FCNR(B) FLOWS
Total foreign-bank mobilisation
>$8 billion
HSBC
>$6 billion
████████████████████████
Other foreign banks
Balance
███████
The concentration of inflows among certain banks means the impact on liquidity and bond demand is also likely to be uneven across the banking sector.
SBI Research raises its inflow forecast
The strong early mobilisation has caused analysts to increase their expectations for total FCNR(B) inflows.
SBI Research has raised its estimate for FCNR(B) inflows during the full window to $65 billion-$70 billion, from its earlier estimate of $40 billion-$45 billion.
Including overseas foreign currency borrowings and external commercial borrowings, SBI Research estimates that total inflows could reach $80 billion-$85 billion.
| Forecast | Earlier estimate | Latest estimate |
|---|---|---|
| FCNR(B) inflows | $40–45B | $65–70B |
| Total facilities | — | $80–85B |
| Actual total as of July 31 | — | $40.82B |
FCNR(B) FORECAST
Earlier
$40–45B
██████████████
Latest
$65–70B
██████████████████████
Potential increase
~$25B
The upgraded estimate reflects the pace at which deposits have been mobilised since the scheme began.
The September 30 deadline is important
Banks can mobilise eligible FCNR(B) deposits under the concessional scheme until September 30, 2026.
That deadline could encourage banks to continue attracting deposits aggressively during the remaining period.
More inflows could translate into continued demand for three- to five-year government bonds.
NOW
↓
Strong FCNR(B) mobilisation
↓
More bank liquidity
↓
3–5Y G-Sec demand
BEFORE SEPTEMBER 30
↓
Potential additional inflows
↓
Potential additional bond demand
Dealers cited by Business Standard expect the five-year versus 10-year spread to widen further by September if the inflows continue at the current pace.
What happens to bond yields?
Bond prices and yields move in opposite directions.
When demand for government bonds increases:
Higher demand
↓
Bond prices rise
↓
Bond yields fall
That is what appears to be happening in the five-year segment.
The additional FCNR(B)-related liquidity is creating a large pool of funds that banks need to deploy, and government securities provide a liquid and relatively low-risk option.
Why the 10-year benchmark has been less affected
The 10-year government bond has not experienced the same degree of yield decline.
The reason is largely duration risk.
Banks receiving temporary or uncertain liquidity may not want to lock themselves into longer-duration securities if credit demand or interest-rate expectations could change.
BANK LIQUIDITY
Need flexibility
↓
Shorter maturity
↓
3–5 year bonds
Less attractive
↓
Longer-duration bonds
↓
10-year+
This explains why the yield curve has become more differentiated between the five-year and 10-year segments.
The yield curve is sending a liquidity signal
The widening spreads are not necessarily a pure signal about future inflation or interest rates.
They also reflect the composition of demand in the bond market.
Traditional yield-curve drivers
+
FCNR(B) liquidity
+
Bank investment preferences
↓
Current yield-curve movement
This is important because the current movement could be partly driven by a temporary policy-induced liquidity event.
Could the effect reverse later?
Potentially.
The concessional FCNR(B) mobilisation window is temporary. If banks stop receiving fresh inflows after the deadline, the extraordinary liquidity impulse could gradually diminish.
The impact on bond yields will then depend on:
- Credit demand
- RBI liquidity policy
- Government borrowing
- Inflation
- Interest-rate expectations
- Foreign portfolio flows
- Bank treasury strategies
FCNR(B) WINDOW
↓
Temporary liquidity boost
↓
Strong G-Sec demand
↓
Lower short/intermediate yields
After window
↓
Liquidity normalisation
↓
Market reassesses demand
Therefore, the current five-year bond rally should not automatically be extrapolated indefinitely.
Impact on banks
The policy can benefit banks through several channels.
| Channel | Potential impact |
|---|---|
| FCNR(B) deposits | More foreign-currency funding |
| RBI swap | Lower hedging burden |
| Rupee liquidity | More funds available |
| Bulk deposits | Lower dependence |
| Certificate of deposits | Potentially lower funding rates |
| G-Sec investments | Safe deployment avenue |
| Credit growth | More funding available if demand rises |
| Net interest margin | Potential funding-cost benefit |
The magnitude will vary considerably by bank.
Impact on government borrowing
Strong demand for government securities can also be supportive for the government’s borrowing programme.
If banks buy more government bonds, the additional demand can help absorb sovereign debt issuance.
Lower yields can also reduce the government’s borrowing cost at the margin, although the actual impact depends on the broader bond market and the entire yield curve.
More bank demand
↓
Higher G-Sec demand
↓
Lower yields
↓
Potentially lower borrowing cost
This is a potential benefit rather than a guaranteed outcome because government bond yields are influenced by many factors.
Impact on the rupee
The FCNR(B) scheme was introduced partly to encourage foreign-currency inflows.
More foreign currency entering the banking system can provide support to India’s external financing position.
However, the ultimate impact on the rupee depends on how the RBI manages the foreign-exchange liquidity created through the swap facility and on broader currency-market conditions.
The mechanism is therefore more complex than simply equating FCNR(B) inflows with rupee appreciation.
The RBI’s role is central
The RBI is effectively facilitating the conversion of foreign-currency deposits into rupee liquidity through its swap facility.
According to the central bank’s FAQ, the facility is a plain buy/sell foreign-exchange swap covering the principal amount of eligible FCNR(B) deposits.
FOREIGN CURRENCY
↓
FCNR(B) deposit
↓
RBI FX swap
↓
Rupee liquidity
↓
Indian banking system
The RBI therefore becomes an important part of the liquidity transmission mechanism.
What is an FCNR(B) deposit?
FCNR(B) stands for Foreign Currency Non-Resident (Bank) deposit.
Unlike a conventional rupee fixed deposit, an FCNR(B) deposit is maintained in a permitted foreign currency.
For eligible non-resident depositors, this provides protection against direct rupee depreciation risk because the deposit and interest are denominated in the foreign currency.
RUPEE DEPOSIT
USD → INR
↓
Currency risk for depositor
FCNR(B)
USD
↓
USD deposit
↓
USD principal + interest
The RBI’s special swap facility makes these deposits more attractive to banks by reducing the cost of hedging their foreign-currency exposure.
Why this matters for the broader economy
The current flow illustrates how a central-bank policy aimed at attracting foreign currency can have consequences far beyond the foreign-exchange market.
RBI policy
↓
FCNR(B) inflows
↓
Bank liquidity
↓
Government bond purchases
↓
Lower 3–5Y yields
↓
Deposit/CD pricing
↓
Bank funding costs
↓
Potential credit-market effects
The policy is therefore influencing both the foreign-exchange market and domestic fixed-income market.
Key numbers at a glance
┌─────────────────────────────────────┐
│ FCNR(B) SWAP WINDOW │
├─────────────────────────────────────┤
│ Total inflows by July 31 $40.82B │
│ FCNR(B) portion $36.73B │
│ Overseas FX borrowings $2.58B │
│ ECB inflows $1.52B │
│ Foreign-bank FCNR(B) >$8B │
│ HSBC mobilisation >$6B │
│ SBI FCNR(B) forecast $65–70B │
│ Total potential inflows $80–85B │
│ Deposit tenure 3–5 years │
│ Mobilisation deadline Sept 30 │
│ Current 5Y–10Y spread 41 bps │
└─────────────────────────────────────┘
What to watch next
The next few weeks will be important for India’s bond market.
1. FCNR(B) mobilisation
Will inflows continue accelerating before September 30?
2. Five-year G-Sec yields
Will continued bank demand push five-year yields lower?
3. Five-year versus 10-year spread
Dealers expect the spread could widen further.
4. Credit growth
If loan demand accelerates, banks may redirect some of the new liquidity away from government securities.
5. Bulk deposit rates
Banks with strong FCNR(B) mobilisation may have less need to offer high rates for bulk deposits.
6. RBI liquidity management
The central bank’s handling of the additional foreign-exchange and rupee liquidity will remain important.
7. Post-September market behaviour
The most interesting question may be what happens after the special mobilisation window closes.
The market impact in one graphic
RBI CONCESSIONAL SWAP
│
↓
FCNR(B) INFLOWS
│
↓
BANK LIQUIDITY
│
┌────────────┴────────────┐
↓ ↓
Loan demand G-Sec purchases
│ │
↓ ↓
Credit growth 3–5Y bond demand
│
↓
Bond prices ↑
│
↓
Yields ↓
│
↓
5Y–10Y spread widens
Conclusion
The RBI’s concessional FCNR(B) swap facility is having a noticeable impact on India’s government bond market, with three- to five-year government securities emerging as a major destination for the liquidity generated by the foreign-currency inflows. Foreign banks, in particular, are directing a substantial portion of the money toward government bonds because their relatively smaller lending books cannot absorb the inflows as quickly.
The scale is already substantial. Total inflows under the relevant facilities reached $40.82 billion by July 31, of which $36.73 billion came through FCNR(B) deposits. Foreign banks had mobilised more than $8 billion, with HSBC accounting for more than $6 billion.
This liquidity is helping explain why the five-year government bond has outperformed the 10-year benchmark. The five-year versus 10-year spread widened from 19 basis points on June 1 to as much as 46 basis points, before standing at 41 basis points on Monday.
The policy is also affecting the banking system beyond government bonds. Banks have more liquidity available to replace expensive bulk deposits and reduce reliance on certificates of deposit, potentially easing funding-cost pressures. SBI Chairman C S Setty has said the FCNR(B) mobilisation should help reduce pressure on bulk deposit pricing, although the benefit is likely to be greater for banks that have attracted larger inflows.
SBI Research has responded to the strong mobilisation by raising its estimate for FCNR(B) inflows during the full window to $65 billion-$70 billion, compared with its earlier estimate of $40 billion-$45 billion. Including other facilities, total inflows could reach $80 billion-$85 billion.
The key question now is how long the bond-market effect will last. The FCNR(B) mobilisation window closes on September 30, meaning the current wave of liquidity is partly policy-driven and temporary. Dealers expect the five-year versus 10-year spread could widen further before the deadline if banks continue receiving deposits at the current pace.
For India’s banking sector, the development provides additional liquidity and potentially cheaper funding. For the government bond market, it creates a strong source of demand for three- to five-year securities. For the RBI, it demonstrates how a measure designed to attract foreign currency can transmit directly into domestic money-market and bond-market conditions.
The bigger takeaway is that FCNR(B) inflows are no longer just an external-sector story. They are increasingly influencing bank liquidity, deposit pricing, government bond yields and the shape of India’s yield curve. The next major test will come after September, when the special inflow window closes and markets have to determine how much of the current bond-demand strength can persist without the policy-driven liquidity boost.
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