Punjab National Bank managing director and CEO Ashok Chandra said the banking sector could mobilise $35 billion to $40 billion through foreign currency deposits under a scheme announced by the Reserve Bank of India (RBI) on 5 May.

Aimed at attracting dollar inflows and stemming the slide of the rupee, the RBI on Friday had announced that it would bear the full hedging cost for three-year to five-year foreign currency non-resident (FCNR) deposits.

Chandra said the RBI’s steps are ‘highly positive’ for banks and PNB itself is eyeing to raise about $2.5 billion to $3 billion through the FCNR route. External commercial borrowing (ECB) inflows are also expected to improve.

The scheme allows banks to offer overseas customers a more lucrative rate of interest to draw dollar deposits.

The rate that banks will offer will be higher than the US treasury rate and definitely will attract investors, news agency Reuters quoted Chandra as saying. He, however, declined to specify what rate the bank will offer.

Three-year US treasuries yield 4.203% while five-year notes offer 4.273%. Currently, non-resident deposits earn 3.5% but with the RBI bearing the hedging cost, banks will be able to offer a higher rate to customers.

"It is a win-win situation for non-resident Indians and for the banks," Reuters quoted Chandra as saying.

It plans to market these deposits aggressively in key Indian diaspora markets such as the United States, Canada, United Kingdom and the Middle East, pitching returns that exceed US Treasury yields, Chandra further stated.

Other mid-sized state-run lenders such as Indian Bank, Canara Bank and Central Bank of India pegged likely inflows at between $20 billion and $25 billion, while private sector lender Federal Bank expected possible flows of $30 billion.

"Unlike 2013 where the interest differential between U.S. and India was in the range of 5-6%, compared to 1-2% presently, the relative attractiveness is lower," Reuters quoted Federal Bank executive director Harsh Dugar as saying.

The RBI had last launched the scheme in 2013 when the Indian rupee had depreciated sharply due to the US Federal Reserve's "taper tantrum".

Details on the scheme, in particular, whether banks will be allowed to offer customers leverage to park such deposits is awaited and could be key to its success, brokerage house Jefferies said in a note on Monday.

"We will watch out for RBI's stance on client leverage as this may be key determinant of extent of mobilisation under this scheme," Jefferies analysts said.