Reserve Bank of India Raises Interest Rate Ceiling for Foreign Currency Deposits to Boost Forex Inflows
The Reserve Bank of India (RBI) has raised the interest rate ceiling that banks can offer for foreign currency non-resident (FCNR-B) deposits to boost forex inflows. The move comes at a time when the Indian rupee has been regularly hitting all-time lows.
FCNR-B is a term deposit account that non-resident Indians (NRIs) can open with banks in a foreign currency. The account is maintained in a foreign currency, making it attractive for NRIs as they are not exposed to exchange rate risk.
The RBI has raised the interest rate ceiling for FCNR-B deposits with maturity between 1-3 years to the relevant reference rate plus 400 basis points, and for deposits with maturity between 3-5 years to the reference rate plus 500 basis points. This is 200 basis points higher than the current ceiling.
The decision is seen as a move to boost forex inflows, which have been impacted by heavy foreign portfolio outflows from India. The RBI has sold $35-40 billion in the spot and forward segments of the forex markets over the past two months, while building up an estimated $60 billion in short dollar/rupee positions in the non-deliverable forwards market.
The rupee has been facing pressure on multiple fronts, including concerns over incoming US President Donald Trump’s tariff policies, portfolio outflows, weakness in Asian peers, and slowing growth. The rupee dropped to a lifetime low of 84.7575 to the US dollar on Tuesday.
However, some analysts do not see the RBI measure helping the rupee much. “Don’t think there will be significant accretion of FX deposits as a result of this measure,” said Mandar Pitale, head of treasury at SBM Bank India. “It may benefit banks who already have organic demand for such deposits but others can raise funds more cheaply in the local market so they are unlikely to exercise the raised ceiling.”