Banks can now offer FCNR-B deposit rates up to ARR plus 400 basis points for 1-3 years and ARR plus 500 basis points for 3-5 years, significantly raising the previous caps.
The Reserve Bank of India (RBI) on Friday increased interest rate ceilings on Foreign Currency Non-Resident Bank (FCNR-B) deposits, a move aimed at attracting more foreign capital and stabilising the rupee. This announcement was made by RBI Governor Shaktikanta Das during the latest bi-monthly monetary policy review.
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Banks can now offer higher interest rates for these deposits. For tenors of 1 to 3 years, rates are capped at the Overnight Alternative Reference Rate (ARR) plus 400 basis points, up from the earlier limit of 250 basis points. Similarly, deposits of 3 to 5 years can now attract ARR plus 500 basis points, an increase from the previous 350 basis points cap.
What Does This Mean?
These changes make FCNR-B deposits more attractive to non-resident Indians (NRIs) by allowing banks to offer better returns on foreign currency holdings. This strategy aims to draw in higher foreign currency deposits, boosting India’s forex reserves, which have seen significant depletion due to efforts to contain rupee volatility.
The Indian rupee has been facing severe pressure due to the outflow of foreign funds amid weak equities. It recently hit as low as 84.73 to a US dollar.
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By raising interest rate ceilings, the RBI is incentivising NRIs to park their funds in Indian banks, offering competitive returns in a challenging global economic environment. This measure could provide a much-needed cushion to India’s external sector while addressing the pressures on the domestic currency.
Foreign portfolio investment (FPI) inflows into emerging market economies (EMEs) experienced a general decline in October. However, India has recorded net FPI inflows of $9.3 billion in FY25 so far. To boost capital inflows, the Reserve Bank of India (RBI) has announced an immediate increase in interest rate ceilings on FCNR-B deposits and raised FCNR deposit rates, aiming to enhance India’s appeal as a destination for foreign investments.
What Are FCNR-B Deposits?
FCNR-B (Foreign Currency Non-Resident Bank) deposits are special bank accounts that allow non-resident Indians (NRIs) to deposit their earnings in foreign currencies. These deposits earn interest without the risk of currency fluctuations since they are maintained in the same foreign currency. They offer NRIs a safe and tax-efficient way to grow their savings while benefiting from attractive interest rates provided by Indian banks.
