The Reserve Bank of India’s (RBI) move to keep higher interest rate caps on the foreign currency non-resident banks (FCNR-B) deposits till the end of the fiscal could have a sentimental impact on capital inflows from abroad via this route. However, it may not trigger much influx in the short term as the current dollar FCNR rates of banks are way below the current ceilings.
The RBI move, in the wake of a recent dip in India’s forex reserves, is aimed at boosting forex inflows via the NRI deposits route, and ease the downward pressure on the rupee.
As per the Balance of Payments’ data, NRI deposits recorded net inflows of $4 billion in Q1FY25, higher than $2.2 billion a year ago. This is a relatively small window of capital inflows; the larger components of the capital account include portfolio investments, ECBs and banking capital.
An FCNR account is a foreign currency denominated account in a bank where non-resident Indians (NRIs) can deposit their savings. Besides the US dollar, FCNR deposits can be held in a host of other currencies including pound sterling, euro, Japanese yen, Australian dollar and Canadian dollar, UAE dirham. As the money is being held in these currencies, the risk of exchange rate fluctuations is mitigated.
According to the RBI decision, effective from December 6, banks can now offer higher interest rates for these deposits. At present, interest rates on FCNR-B deposits are subject to ceilings of Overnight Alternative Reference Rate (ARR)– a benchmark interest rate that is used to price loans and other financial products – for the respective currency/swap, plus 250 basis points for deposits of 1 year to less than 3 years maturity and ARR plus 350 basis points for deposits of 3 to 5 years maturity.
Banks have now been permitted to raise fresh FCNR-B deposits of 1 year to less than 3 years maturity at rates not exceeding ARR plus 400 bps, and deposits with maturity between 3 to 5 years at rates not exceeding ARR plus 500 bps. This relaxation will be available till March 31, 2025.
Manish Bhandari, CEO and Portfolio Manager, Vallum Capital Advisors said: “We foresee inflows will come as it is a very attractive proposition for NRIs to park money in a rising economy.” Mandar Pitale, head treasury, SBM Bank India, however, said that though the increase in ceiling on FCNR deposit interest rates would have sentimental impact, actual incremental influx of dollars needs to be watched.
Achala Jethmalani, economist, RBL Bank said: “At this point in time when looking at the existing rates offered by banks the immediate impact and implications appear to be muted given that this window is open till March 2025. Any additional dollar inflow, nevertheless, is a definite positive.”
India’s foreign exchange reserves have come down reduced from an all-time high of $705 billion as on September 27, 2024 to $658 billion as on November 29,2024. One key reason for the decline is RBI’s intervention in the forex market via sale of dollars to curb rupee’s volatility.
The rupee has been facing severe pressure due to the outflow of foreign funds. On December 3, it hit a record-low of 84.77 against the US dollar. Rupee has depreciated by 149 paise or 1.79% from Rs 83.21 on December 29, 2023 to 84.70 on December 5, 2024.
Currently, there is an outstanding of $31 billion in FCNR-B account, with an additional inflow of approx $5.3 billion from April-September 2024, much higher than the NRE and NRO accounts. This period has seen maximum outflow by FPIs.
In FY25, so far, the net FPI inflows (equity and debt) stood at $8.94 billion, down from $25.26 billion in the corresponding period of FY24.