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

The Reserve Bank of India has taken a strategic step to help Indian banks strengthen their long-term funding by temporarily removing the interest rate ceiling on non-resident deposits. This regulatory shift allows banks to offer significantly higher returns to the Indian diaspora, facilitating much-needed liquidity and long-term liability management.

Boosting Liquidity via FCNR-B and NRE Accounts

The RBI’s directive, which comes into effect immediately, removes the interest rate cap on both fresh Foreign Currency Non-Resident (FCNR-B) deposits for tenures of three to five years and Non-Resident External (NRE) accounts for tenures of three years and above. This policy change remains valid until September 30, 2026.

By lifting these restrictions, the central bank is empowering banks to aggressively pursue overseas fund mobilisation. This is particularly crucial for institutions facing challenges in building long-term liabilities or those struggling to maintain liquidity buffers at required threshold levels. The move is expected to help banks strengthen their Asset Liability Management (ALM) profiles by securing more predictable, long-tenor deposits.

The Shift from 4% to Potential 8% Returns

Before this regulatory intervention, banks were offering relatively modest interest rates, ranging between 3.5% and 4% for three to five-year FCNR-B deposits. Following the RBI's decision, banks had already moved to raise rates by 250 to 450 basis points.

Previously, banks were constrained by a 350 basis point ceiling over the underlying alternate reference rate for dollars (which stood at 3.63% until the end of June), preventing them from exceeding a 7.13% rate. With the cap removed, industry experts suggest that some banks may now offer rates of 8% or even higher to attract granular and sustainable deposits. In some instances, banks might even match the rates offered on local deposits to entice overseas investors, given that foreign currency deposits are typically held for much longer durations.

Reducing Hedging Costs for Indian Lenders

A significant driver behind this ease in regulation is the RBI's decision to bear the hedging costs on foreign currency-linked deposit mobilisation. By allowing banks to swap dollars at par, the regulator has effectively provided a mechanism for hefty cost savings.

This reduction in the cost of hedging makes it economically viable for banks to offer higher interest rates to NRIs without severely eroding their margins. While the technical ability to raise rates is now available, the actual implementation will depend on the individual risk appetite of each bank. However, banks headquartered in Southern India, which traditionally have a strong presence among the Indian diaspora, are expected to be the most proactive in tapping into this opportunity.

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