Mumbai: The Reserve Bank of India (RBI) has temporarily relaxed interest rate restrictions on select non-resident deposits, allowing banks greater flexibility to offer higher returns on fresh Foreign Currency Non-Resident (Bank) [FCNR(B)] and Non-Resident External (NRE) deposits. The move is aimed at attracting more overseas funds, boosting foreign exchange reserves and supporting the Indian rupee amid global economic uncertainties.
The relaxation will remain in effect until September 30 and is expected to encourage non-resident Indians (NRIs) and overseas investors to increase deposits in Indian banks.
According to the RBI, the temporary measures are designed to strengthen foreign currency inflows at a time when the country is facing external pressures arising from rising global commodity prices and fluctuations in international capital flows.
Interest rate ceilings removed on select deposits
Under the revised norms, the central bank has removed the interest rate ceiling on fresh FCNR(B) deposits with maturities of more than three years and up to five years.
The RBI has also withdrawn restrictions on interest rates offered on fresh NRE deposits with a maturity period of three years and above.
However, the exemption will not apply to transfers from Non-Resident Ordinary (NRO) accounts to NRE accounts, the central bank clarified.
The move gives banks the freedom to determine competitive interest rates based on market conditions and their funding requirements.
Previous restrictions on deposit rates
Before the latest relaxation, banks were required to ensure that interest rates offered on NRE deposits did not exceed the rates available on comparable domestic rupee term deposits.
Similarly, FCNR(B) deposits with maturities between three and five years were subject to an interest rate cap linked to the applicable overnight alternative reference rate or swap rate plus 350 basis points.
By removing these ceilings, the RBI has provided banks with greater flexibility to attract foreign currency and rupee deposits from NRIs and overseas savers.
Financial experts believe the move could lead to more attractive deposit schemes and encourage higher participation from the Indian diaspora.
Measures aimed at strengthening forex reserves
The RBI’s latest decision comes amid efforts to enhance foreign currency inflows and strengthen India’s external financial position.
Recent volatility in global markets, rising crude oil prices and the outflow of foreign portfolio investments have exerted pressure on the country’s foreign exchange reserves and the rupee.
The central bank has introduced several measures in recent months to encourage foreign investment and improve liquidity in foreign currency markets.
Analysts believe higher inflows into FCNR(B) and NRE deposits could help stabilise the balance of payments and improve the availability of foreign exchange in the banking system.
Foreign investment rules also eased
Earlier this month, the RBI expanded investment opportunities by allowing all foreign individual investors to directly purchase shares in listed Indian companies.
The move widened access beyond Non-Resident Indians and Overseas Citizens of India and followed amendments to foreign exchange regulations aimed at encouraging greater overseas participation in Indian financial markets.
The central bank has also introduced a special swap facility that absorbs a significant portion of the hedging costs normally borne by banks when raising foreign currency deposits.
As a result, several public and private sector banks have passed on the benefit to customers by substantially increasing rates on dollar-denominated FCNR deposits.
Banks offer higher returns to NRIs
Following the RBI’s measures, a number of banks have announced higher interest rates on eligible FCNR deposit tenors.
Industry reports indicate that some lenders are currently offering returns ranging between 6 per cent and 7.10 per cent on select FCNR deposits, making them more attractive to overseas investors and savers.
Banking experts expect the temporary relaxation to boost foreign currency inflows over the coming months and provide additional support to India’s foreign exchange reserves.
The RBI’s latest initiative reflects its broader strategy of maintaining external sector stability while ensuring adequate foreign currency liquidity in the financial system during a period of global economic uncertainty.