RBI Removes Rate Caps on FCNR-B Deposits and NRE Accounts

The Reserve Bank of India (RBI) has temporarily lifted the rate caps on foreign currency non-resident bank (FCNR-B) deposits and non-resident external (NRE) accounts, allowing banks to offer higher interest rates to attract long-term deposits.

Temporary Removal of Rate Caps Sparks Interest Rate Hike

The RBI’s decision, which comes into effect immediately, will remain valid until September 30, 2026. This move is expected to benefit banks facing challenges in building long-term liabilities and maintaining liquidity buffers at threshold levels.

Banks have already raised FCNR-B deposit rates by 250-450 basis points in the past few days following the regulator’s decision to bear the hedging on foreign currency-linked deposit mobilisation and swap the dollar with it at par, allowing hefty cost savings for banks.

Impact on FCNR-B Deposits

With the cap lifted, banks may raise the FCNR-B rates further to 8% or beyond, offering rates comparable to local deposits. Some banks may be ready to offer the same rates as local deposits, as foreign currency deposits will be for long-term while the maturity period for local deposits are typically one to two years.

Market Impact and Details

• The RBI’s decision will allow banks to offer higher rates on overseas deposits than local deposits, making them more attractive to investors.
• Banks headquartered in southern states are traditionally more active in tapping the Indian Diaspora to mobilise deposits.
• The removal of the restriction on NRE deposits will enable banks to offer higher interest rates on overseas deposits.

Key Takeaways

• The RBI has temporarily lifted the rate caps on FCNR-B deposits and NRE accounts until September 30, 2026.
• Banks may raise the FCNR-B rates further to 8% or beyond, offering rates comparable to local deposits.
• The decision will allow banks to offer higher rates on overseas deposits than local deposits.

FAQs

What is the impact of the RBI’s decision on FCNR-B deposits?

The RBI’s decision will allow banks to raise the FCNR-B rates further to 8% or beyond, offering rates comparable to local deposits.

How will the removal of the restriction on NRE deposits affect banks?

The removal of the restriction on NRE deposits will enable banks to offer higher interest rates on overseas deposits, making them more attractive to investors.

What is the significance of the RBI’s decision for banks headquartered in southern states?

Banks headquartered in southern states are traditionally more active in tapping the Indian Diaspora to mobilise deposits, and the RBI’s decision will enable them to offer higher interest rates on overseas deposits.

Conclusion

The RBI’s decision to temporarily lift the rate caps on FCNR-B deposits and NRE accounts will allow banks to offer higher interest rates to attract long-term deposits. This move is expected to benefit banks facing challenges in building long-term liabilities and maintaining liquidity buffers at threshold levels. As the cap will no longer be there till September-end, banks may raise the FCNR-B rates further to 8% or beyond, offering rates comparable to local deposits. We recommend that investors consider taking advantage of this opportunity to earn higher returns on their overseas deposits.