RBI Raises Interest Rates on NRI Foreign Currency Deposits

The Reserve Bank of India (RBI) announced an increase in the interest rate ceilings on Foreign Currency Non-Resident Bank (FCNR(B)) deposits. This measure is designed to help Non-Resident Indians (NRIs) earn higher returns on their foreign currency savings.

Effective December 6, 2024, banks are allowed to offer rates up to ARR plus 400 basis points (bps) for deposits with a maturity of 1 to less than 3 years and ARR plus 500 bps for those with a maturity of 3 to 5 years. This relaxation is available until March 31, 2025.

Objective: Strengthening the Indian Rupee

The RBI's move aims to attract foreign capital inflows amidst the ongoing pressure on the Indian rupee. The rupee has been impacted by significant outflows from foreign investors withdrawing from Indian stock markets. The measure is expected to stabilize "hot money" outflows and bolster foreign reserves.

FCNR(B) Accounts: A Safe Option for NRIs

FCNR(B) accounts allow NRIs to hold their earnings in foreign currencies such as USD and GBP, providing protection against exchange rate volatility. The increased interest rates make these deposits more lucrative, offering NRIs an attractive option to park their foreign earnings.

Previous Interest Rate Ceilings

Before this announcement, interest rates on FCNR(B) deposits were capped at:

• ARR plus 250 bps for deposits of 1 year to less than 3 years.

• ARR plus 350 bps for deposits of 3 to 5 years.

The relaxation now permits banks to offer higher rates across all tenors, enhancing the appeal of these deposits.

Introduction of Secured Overnight Rupee Rate (SORR)

In addition to revising FCNR(B) deposit ceilings, the RBI has decided to move forward with the implementation of the Secured Overnight Rupee Rate (SORR). This benchmark will be based on secured money market transactions. The initiative aligns with the recommendations of the RBI’s Committee on the MIBOR Benchmark.

Committee on MIBOR Benchmark

The Committee on the MIBOR Benchmark, chaired by Ramanathan Subramanian, was tasked with reviewing the rupee interest rate benchmarks in India, particularly the Mumbai Interbank Outright Rate (MIBOR). The Committee proposed transitioning to alternative benchmarks and suggested measures to enhance the interest rate derivative market.

Recommendations Under Review

The RBI has reviewed the Committee's recommendations and public feedback on the report published on its website. While it is proceeding with the adoption of SORR, other suggestions are currently under consideration.