RBI Lifts Cap on NRI Deposit Rates to Boost Overseas Fund Mobilisation

The Reserve Bank of India has taken a significant step to bolster the liquidity positions of Indian banks by temporarily removing the interest rate ceiling on non-resident deposits. This strategic move allows banks to aggressively compete for overseas funds, providing much-needed long-term stability to their balance sheets.

Strengthening Long-Term Liabilities and Liquidity

The RBI's directive removes the interest rate cap on both fresh Foreign Currency Non-Resident (FCNR-B) deposits with tenures of three to five years and Non-Resident External (NRE) accounts for terms of three years and above. This policy change, which includes deposits renewed upon maturity, remains valid until September 30, 2026.

For many Indian lenders, particularly those struggling to build long-term liabilities or maintain adequate liquidity buffers, this is a massive opportunity. By tapping into the Indian diaspora, banks can secure granular and sustainable deposits that are crucial for maintaining a healthy Liquidity Coverage Ratio (LCR). Industry experts suggest that this move will significantly assist banks in strengthening their Asset Liability Management (ALM) profiles.

Potential for Interest Rates to Hit 8%

Before this regulatory shift, banks were largely restricted in what they could offer. Prior to the RBI's decision to bear the hedging costs, FCNR-B deposit rates typically hovered between 3.5% and 4% for three-to-five-year tenures. Even after an initial increase, banks were unable to push rates beyond 7.13% due to a 350 basis point ceiling on the underlying alternate reference rate for dollars.

With the cap now removed, the landscape has changed dramatically. Analysts predict that some banks may offer interest rates as high as 8% or even more to attract long-tenor deposits. Interestingly, some lenders may even offer rates on overseas deposits that exceed those of local domestic deposits, given that foreign currency deposits are being sought for much longer durations than the typical one-to-two-year local deposit cycles.

Reduced Hedging Costs Drive Competitive Pricing

A critical component of this development is the RBI's decision to bear the cost of hedging on foreign currency-linked deposit mobilisation. By allowing banks to swap dollars at par, the central bank has enabled massive cost savings for the banking sector.

In the immediate aftermath of the decision, many banks had already raised FCNR-B deposit rates by 250 to 450 basis points. While the ability to offer these higher rates will ultimately depend on an individual bank's appetite and capital requirements, the structural barriers to high-yield NRI deposits have been dismantled. Banks headquartered in Southern India, which have a historical strength in tapping into the global Indian diaspora, are expected to be among the most active participants in this new high-yield environment.

Key Takeaways