Interest rate cap on FCNR(B), NRE deposits temporarily lifted

Currently, the overnight alternative reference rate (ARR) for the applicable currency/swap plus 250 basis points for deposits with maturities of 1 year to less than 3 years and overnight ARR plus 350 basis points for deposits with maturities of 3 years and above and up to 5 years are the maximum interest rates that can be levied on foreign currency non-resident bank (FCNRB) deposits. Interest rates on NRE deposits must not be higher than those provided by the banks on equivalent domestic rupee term deposits, according to prevailing guidelines. However, the Reserve Bank of India (RBI) has opted to temporarily authorise banks to raise new FCNR(B) and NRE deposits without regard to the existing guidelines on interest rates, effective July 7, 2022, according to its circular of July 6, 2022. The time frame for this relaxation is from now until October 31, 2022.

In its circular, RBI has said that “At present, interest rates on Foreign Currency Non-Resident Bank [FCNR(B)] deposits are subject to ceilings of Overnight Alternative Reference Rate (ARR) for the respective currency/swap plus 250 basis points for deposits of 1 year to less than 3 years maturity and overnight ARR plus 350 basis points for deposits of 3 years and above and up to 5 years maturity. In case of NRE deposits, as per extant instructions, interest rates shall not be higher than those offered by the banks on comparable domestic rupee term deposits. It has been decided to temporarily permit banks to raise fresh FCNR(B) and NRE deposits without reference to the extant regulations on interest rates, with effect from July 7, 2022. This relaxation will be available for the period up to October 31, 2022.”

In accordance with the RBI, interest on floating-rate deposits shall be paid within the swap rate limitation for the relevant currency and maturity, and interest on fixed-rate deposits must be paid within the Overnight Alternative Reference Rate (OARR) cap for the relevant currency and timeframe. The basis for determining the maximum rates for the interest rates offered with effect in the following month is the Overnight Alternative Reference Rate for the relevant currency/SWAP rates as of the last working day of the preceding month. For the purpose of determining the interest rates on FCNR (B) deposits, the Overnight Alternative Reference Rate for the relevant currency / Swap rates cited by the Foreign Exchange Dealers Association of India (FEDAI) shall be utilised as the reference.

Banks' Foreign Currency (Non-resident) Account (B) Scheme - FCNR (B) Accounts are kept in foreign currencies in the form of term deposits, or fixed deposits. FCNR deposits may be opened by NRIs, PIOs, and OCIs, and the account may be jointly maintained in the names of two or more NRIs/PIOs. Currently, FCNR(B) deposits can be made in multiple currencies such as USD, British pound sterling (GBP), Australian dollars (AUD), Euros (EUR), and Canadian dollars (CAD) and more.

The Reserve Bank of India today announced a number of measures to boost foreign exchange inflows, diversify and broaden the sources of foreign exchange funding, and reduce global impacts in order to reduce volatility. On of the measure that RBI has also announced that “At present, banks are required to include all Foreign Currency Non-Resident (Bank) [FCNR(B)] and Non-Resident (External) Rupee (NRE) deposit liabilities for computation of Net Demand and Time Liabilities (NDTL) for maintenance of CRR and SLR. It has been decided that with effect from the reporting fortnight beginning July 30, 2022 incremental FCNR(B) and NRE deposits with reference base date of July 1, 2022 will be exempt from the maintenance of CRR and SLR. This relaxation will be available for deposits mobilised up to November 4, 2022. Transfers from Non-Resident (Ordinary) (NRO) accounts to NRE accounts shall not qualify for the relaxation.”