RBI Unleashes Interest Rate Ceiling on FCNR-B Deposits to Fuel Massive Capital Inflows

RBI Unleashes Interest Rate Ceiling on FCNR-B Deposits to Fuel Massive Capital Inflows​

The Reserve Bank of India (RBI) has taken a significant step to encourage foreign capital inflows by temporarily withdrawing the interest rate ceiling on fresh three and five year Foreign Currency Non-Resident bank (FCNR-B) deposits. This move was announced on June 17 as part of the RBI's ongoing review of its deposit interest rate directives dating back to 2025.

The central bank also lifted restrictions on interest rates for non-resident external (NRE) deposits with tenors of three years or more, including those that are renewed upon maturity. These amendments concerning both FCNR-B and NRE deposits will come into immediate effect and remain in place until September 30.

New RBI Directives Clarify Rate Restrictions​

While the rate ceilings have been withdrawn for these specific foreign currency deposits, the RBI maintained a clear guideline for non-resident ordinary (NRO) deposits. Interest rates on NRO or NRE deposits must not exceed those offered by banks on comparable domestic rupee term deposits.

For depositors with tenure ranging from one year to less than three years, the ceiling rate is capped at 250 basis points (bps) above the overnight alternative reference rate. For the longer duration category, which spans three to five years, the permissible ceiling rate can be up to 350 bps above the reference rate.

Central Bank Measures Aim to Attract $50 Billion Inflows​

This latest directive follows a series of measures introduced by the RBI earlier this month. These policies were specifically designed to shore up capital inflows into the country and make the Indian financial market more attractive globally.

The initial package included various support mechanisms, such as hedging support for fresh three and five year deposits. It also provided a concessional swap window for external commercial borrowings (ECBs) involving public sector units.

These combined measures by the central bank are estimated to potentially attract up to $50 billion worth of inflows in the coming months, which could significantly aid the country's capital account stability.

Banks Rapidly Hike FCNR-B Rates Amid New Freedom​

The withdrawal of the interest rate ceiling has prompted a rapid and dramatic shift among domestic lenders as they compete to secure these foreign funds. Multiple public and private financial institutions have begun raising their respective FCNR-B deposit interest rates significantly.

Several major banks, including Yes Bank, Bank of Baroda, and Canara Bank, have been observed increasing the FCNR-B deposit interest rates in recent days. These aggressive increases are aimed at attracting and securing necessary foreign currency inflows for the domestic financial system.