The Reserve Bank of India (RBI) on Wednesday temporarily removed interest-rate caps on select non-resident external (NRE) and foreign currency non-resident (bank) [FCNR(B)] deposits, giving banks greater flexibility to attract overseas funds at a time when policymakers are seeking to strengthen foreign currency inflows and support external-sector stability.
Under the revised framework, banks will be free to offer higher interest rates on fresh NRE deposits with maturities of three years and above. The RBI has also withdrawn the ceiling on interest rates for fresh FCNR(B) deposits with maturities of three to five years. The relaxation will remain in force until September 30 and will apply both to fresh deposits mobilised during the period and to eligible renewals upon maturity.
Banks gain flexibility in pricing NRI deposits
Until now, banks were not permitted to offer interest rates on NRE deposits higher than those available on comparable domestic rupee term deposits. On FCNR(B) deposits, banks could offer a maximum rate equivalent to the overnight alternative reference rate or swap rate for the respective currency plus 350 basis points. With these restrictions now lifted, lenders are expected to compete aggressively for NRI deposits by offering more attractive returns.
The move follows a broader package of measures announced by the RBI earlier this month to attract foreign currency inflows amid concerns over global volatility, elevated oil prices and pressure on India’s balance of payments. The central bank had already announced that it would bear the full hedging cost on fresh FCNR(B) deposits of three to five years mobilised until September 30 through a special swap facility.
Smaller banks will most likely offer higher rates than larger banks as they anyway tend to give higher rates for domestic deposits., experts said.
Several lenders have already raised rates on US dollar-denominated FCNR(B) deposits to between 6% and 7% for three-to-five-year maturities, compared with around 3% earlier. Market participants expect rates to move higher as competition for NRI funds intensifies.
The RBI’s latest move is aimed at encouraging NRIs and overseas citizens of India (OCIs) to channel a larger share of their savings into Indian banks. The deposits offer protection from currency volatility while allowing investors to benefit from higher interest rates than those available in many developed markets.
Move expected to boost forex inflows
According to bankers, the measures could help mobilise tens of billions of dollars over the coming months. The government and RBI have indicated that FCNR(B) deposits, together with other external funding measures, could generate substantial foreign exchange inflows and help strengthen the rupee, improve liquidity and support domestic credit growth.
The central bank clarified that transfers from non-resident ordinary (NRO) accounts to NRE accounts will not be eligible for the exemption. Apart from this restriction, banks have been given significant freedom to determine pricing in line with their funding requirements and competitive strategies.
The relaxation mirrors similar steps taken during earlier episodes of external-sector stress, most notably in 2013, when special FCNR(B) schemes helped attract substantial dollar inflows and stabilise the currency. While current conditions are less severe, policymakers appear keen to build buffers and improve resilience against global uncertainties.
Bankers expect the combination of higher deposit rates, tax-efficient returns and RBI support on hedging costs to make FCNR(B) and long-term NRE deposits among the most attractive savings options currently available to NRIs.