RBI raises interest rate ceiling on FCNR(B) deposits to attract capital flows
In order to attract more capital inflows, the RBI has decided to increase the interest rate ceilings on Foreign Currency (Non-resident) Accounts (Banks)/FCNR(B) deposits for a limited period up to March-end 2025.
Accordingly, effective from December 06, 2024, banks are permitted to raise fresh FCNR(B) deposits of 1 year to less than 3 years’ maturity at rates not exceeding the ceiling of overnight Alternative Reference Rate (ARR) plus 400 basis points (bps) as against 250 bps at present. One basis point is equivalent to one-hundredth of a percentage point.
Similarly, for deposits of 3 to 5 years maturity, the ceiling has been increased to overnight ARR plus 500 bps as against 350 bps at present. This relaxation will be available till March 31, 2025.
Forex reserves
The move to up the interest rate ceilings on FCNR(B) deposits comes in the wake of India’s foreign exchange reserves dipping from an all-time high of $704.89 as on September 27, 2024 to $658.091 billion as on November 29, 2024. One of the reasons for the dip in reserves is RBI’s intervention via Dollar sale in the forex market to contain volatility in the rupee.
Non-resident Indians can park their money in FCNR (B) deposits, which are denominated in pound sterling, US dollar, Japanese yen, euro, Canadian dollars and Australian dollars.
Soumya Kanti Ghosh, Group Chief Economic Advisor, SBI, said the decision to raise the upper limit of FCNR rates will not bring any new capital inflows. Instead, a CRR (cash reserve ratio) cut on such products would have been very helpful.
Barclays, in a report said: “While the intent is understandable, we do not expect meaningful foreign capital inflows via this channel.”