The Reserve Bank of India on Friday raised the cap on the interest rate that banks can offer on foreign currency non-resident deposits (FCNR-B) to boost foreign exchange inflows at a time when the currency is steadily reaching historically low levels.
An FCNR-B is a fixed deposit account that non-resident Indians (NRIs) can open with banks in a foreign currency. As the account is maintained in a foreign currency, the depositor is not exposed to currency risk, making it attractive to NRIs.
The central bank has used this route when the rupee was under pressure, notably in July 2013, when the currency came under attack due to the country's weak macroeconomic fundamentals.
More recently, the RBI announced a similar relaxation in July 2022.
Banks will now be allowed to raise fresh FCRN-B deposits with a tenor between 1 year and less than 3 years at rates not exceeding the relevant benchmark rate plus 400 basis points, the Governor said. RBI, Shaktikanta Das, in his monetary policy statement.
Deposits with maturities between 3 and 5 years may be offered at rates not exceeding the reference rate plus 500 basis points.
For both maturities, that's 200 basis points more than they can currently offer.
Madhavi Arora, chief economist at Emkay Global, said the decision was reportedly taken “while weighing the cost of heavy interventions in the foreign exchange market over the past two months.”
The central bank is estimated to have sold $35-40 billion in the spot and forward segments of the foreign exchange markets during these two months, while building an estimated $60 billion in dollar/rupee short positions in the non-deliverable futures market, amid outflows from overseas portfolios from India, Arora said.
The rupee has faced pressure on several fronts, with concerns over new US President Donald Trump's tariff policies, portfolio outflows, weakness in Asian peers and slowing growth undermining the Indian currency.
The rupee fell to its all-time low of 84.7575 per US dollar on Tuesday. It was last listed at 84.6200.
Mandar Pitale, head of treasury at SBM Bank India, does not think the RBI's measure will be of much help to the rupee.
I don’t think there will be a significant increase in foreign currency deposits as a result of this measure,” he said.
“It may benefit banks that already have organic demand for these types of deposits, but others can raise funds more cheaply in the local market, and are therefore unlikely to exercise the raised cap.
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