In a strategic move to bolster foreign currency inflows and mitigate the pressure on the rupee, the Reserve Bank of India (RBI) announced an increase in the interest rate caps on Foreign Currency Non-Resident Bank [FCNR (B)] deposits. Governor Shaktikanta Das unveiled this measure during the fifth bi-monthly monetary policy meeting for the financial year.
The decision comes at a critical juncture as the rupee grapples with record-low levels against the U.S. dollar, compounded by heightened global economic uncertainties. By offering enhanced returns on FCNR (B) deposits, the RBI aims to attract greater participation from the Indian diaspora, providing much-needed breathing space for India’s foreign exchange reserves.
RBI: New Interest Rate Ceilings for FCNR (B) Deposits
Effective immediately, banks are authorized to offer elevated interest rates on FCNR (B) deposits:
- Deposits of 1 to less than 3 years: Interest rate ceiling raised to the Overnight Alternative Reference Rate (ARR) plus 400 basis points, compared to the earlier cap of 250 basis points.
- Deposits of 3 to 5 years: Ceiling increased to ARR plus 500 basis points, up from 350 basis points.
These revised terms will remain valid until March 31, 2025, providing a temporary yet significant incentive for non-resident Indians (NRIs) to park their funds in India.
Why This Move?
India, the world’s largest recipient of remittances, has previously employed similar strategies during periods of currency volatility. Economists, like Madhavi Arora from Emkay Global Financial Services, see this as a calculated attempt to leverage external capital flows, reducing reliance on direct forex interventions.
The RBI has been deploying its forex reserves to stabilize the rupee, which has depreciated by 1.3% against the dollar over October and November. However, the central bank emphasized that its exchange rate policy remains market-driven, with interventions aimed solely at mitigating undue volatility.
Enhancing Accessibility: FX-Retail Platform Expansion
In tandem with this announcement, Governor Das revealed plans to expand the reach of the FX-Retail platform. Introduced in 2019 by the Clearing Corporation of India Limited (CCIL), the platform offers greater transparency and fairness in forex pricing for individuals and MSMEs.
The RBI now proposes to link FX-Retail with Bharat Connect (formerly Bharat Bill Payment System), a move designed to enhance ease of access and user experience.
What Are FCNR (B) Deposits?
An FCNR (B) account allows NRIs to maintain fixed deposits in India in freely convertible foreign currencies, safeguarding funds against exchange rate fluctuations. The interest earned on these deposits is tax-free in India, making it an attractive financial instrument for expatriates.
Most banks accept FCNR (B) deposits in currencies such as the U.S. Dollar, Pound Sterling, Euro, Japanese Yen, Australian Dollar, and Canadian Dollar. However, premature withdrawals before one year do not earn interest, while withdrawals after one year attract no penalties but earn interest for the actual duration of the deposit.
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