Daijiworld Media Network - Mumbai

Mumbai, Jun 17: The Reserve Bank of India (RBI) on Wednesday announced a temporary relaxation of interest rate restrictions on certain non-resident deposits, allowing banks to offer higher returns on fresh FCNR(B) and NRE deposits in a bid to attract overseas funds, strengthen foreign exchange reserves and support the rupee.

The revised measures will remain in effect until September 30.

Under the new framework, the RBI has removed the interest rate ceiling on fresh Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits with maturities of more than three years and up to five years.

The central bank has also lifted restrictions on interest rates offered on fresh Non-Resident External (NRE) deposits with tenures of three years and above.

However, the RBI clarified that transfers from Non-Resident Ordinary (NRO) accounts to NRE accounts will not be eligible for these exemptions.

Before this relaxation, banks were required to ensure that interest rates on NRE deposits did not exceed the rates offered on comparable domestic rupee term deposits.

Similarly, FCNR(B) deposits with maturities ranging from three to five years were subject to an interest rate cap linked to the applicable overnight alternative reference rate or swap rate plus 350 basis points.

The latest move gives banks greater flexibility to offer more attractive interest rates to non-resident Indians (NRIs), helping them mobilise additional foreign currency and rupee deposits from overseas investors and savers.

The decision comes amid a series of measures aimed at attracting foreign capital at a time when rising global crude oil prices and sustained foreign fund outflows from Indian equity markets have put pressure on the country's foreign exchange reserves and weakened the rupee.

Earlier this month, the RBI expanded investment access by allowing all foreign individual investors to directly purchase shares in listed Indian companies, extending opportunities beyond non-resident Indians (NRIs) and Overseas Citizens of India (OCIs).

The move followed amendments to foreign exchange regulations designed to create additional investment avenues for overseas investors.

The central bank has also introduced a special swap facility that absorbs a significant portion of the hedging costs typically borne by banks.

As a result, several public and private sector banks have passed on the benefits to customers by substantially increasing interest rates on dollar-denominated FCNR deposits.

Some lenders are currently offering returns ranging between 6 per cent and 7.10 per cent, depending on the deposit tenure.

The RBI's latest measures are expected to encourage higher inflows from overseas Indians, improve foreign exchange liquidity and provide additional support to the Indian currency amid uncertain global economic conditions.