On December 6, 2024, the Reserve Bank of India (RBI) issued an important update regarding the interest rates on Foreign Currency (Non-Resident) Accounts (Banks) (FCNR(B)) deposits. This update, outlined in RBI/2024-25/94 and DoR.SPE.REC.No.51/13.03.00/2024-2025, has far-reaching implications for banks that offer FCNR(B) deposit schemes, including Scheduled Commercial Banks (SCBs), Regional Rural Banks (RRBs), Small Finance Banks, Local Area Banks, and Payments Banks, among others.
FCNR(B) deposits are foreign currency deposits held by non-resident Indians (NRIs) in Indian banks. These deposits are a popular option for NRIs who wish to safeguard their savings in foreign currencies, offering them the dual benefit of earning interest and avoiding currency risk as the deposits are maintained in a foreign currency rather than Indian Rupees (INR). However, the interest rates on these deposits have been subject to regulatory guidelines, which have now undergone a significant change.
Key Changes in the FCNR(B) Deposit Rates
Historically, the interest rates on FCNR(B) deposits were pegged to an “Overnight Alternative Reference Rate” (ARR) for the respective currency or swap, with an additional margin of 250 basis points (2.50%) for 1-year to less than 3-year maturities, and 350 basis points (3.50%) for deposits with maturities of 3 years and above but not exceeding 5 years. These ceilings were designed to ensure a standardized and competitive rate structure for NRIs while maintaining monetary control and stability in the market.
However, with the recent update, the ceiling on the interest rates for FCNR(B) deposits has been relaxed. Effective December 6, 2024, the RBI has increased the ceiling on fresh FCNR(B) deposits as follows:
1 year to less than 3 years: The ceiling is now set at the Overnight ARR of the respective currency or swap plus 400 basis points (i.e., 4.00%).
3 years and above, up to and including 5 years: The ceiling is now set at the Overnight ARR of the respective currency or swap plus 500 basis points (i.e., 5.00%).
This change is intended to provide higher returns to NRIs, thereby making FCNR(B) deposits more attractive compared to other investment options. The increase in the ceiling rates is designed to improve liquidity and attract more foreign currency into the Indian banking system, which can support India’s external sector and help bolster the overall economy.
Applicability and Duration of the Rate Change
The relaxation in the interest rate ceiling will apply to fresh FCNR(B) deposits raised from the effective date, December 6, 2024. The new interest rate ceilings will remain in effect until March 31, 2025. After this date, it is expected that the RBI will review the prevailing economic conditions and may adjust the ceilings accordingly. Banks will be required to adhere to the new ceilings during this period and ensure that their FCNR(B) deposit offerings comply with the updated guidelines.
Implications for Banks and NRIs
For banks, this relaxation provides an opportunity to offer more competitive interest rates on FCNR(B) deposits, potentially attracting a larger share of the NRI remittance market. As NRIs look for safe and profitable ways to park their savings, the higher interest rates could make FCNR(B) deposits more appealing compared to other fixed-income products.
For NRIs, this policy update is a positive development. The increased ceiling on interest rates will directly benefit those looking to invest in the Indian market without exposing themselves to currency fluctuations. It also provides an opportunity for NRIs to earn higher returns on their foreign currency savings, with the added benefit of retaining the security of their original foreign currency.
