The central bank removed the cap on both fresh Foreign Currency Non-Resident (Bank), or FCNR(B), deposits of three to five years and Non-Resident External (NRE) deposits of three years and above, including deposits renewed upon maturity.
The directions came into effect immediately and will remain valid until September 30, 2026.
“Banks struggling to raise long-term liabilities are more likely to take advantage of the removal of the rate ceiling. As the cap will no longer be in place until September-end, banks may raise FCNR(B) rates to 8% or beyond. This will also help banks’ asset-liability management,” Karur Vysya Bank Treasury Head Rama Chandra Reddy told ET.
Banks have already raised FCNR(B) deposit rates by 250-450 basis points following the regulator’s decision to bear the hedging cost on foreign currency-linked deposit mobilisation and swap dollars at par, resulting in significant cost savings for banks.
However, banks could not raise rates beyond 7.13% because of the existing ceiling of 350 basis points over the applicable alternative reference rate for the US dollar, which stood at 3.63% and was applicable until the end of June.
“As the cap will no longer be there until September-end, banks may raise FCNR(B) rates further to 8% or beyond. Some banks may be ready to offer rates similar to those on domestic deposits because foreign currency deposits will be for longer tenors, while local deposits typically have maturities of one to two years,” a senior executive at a public sector bank said.Prior to the RBI‘s decision to bear the hedging cost, banks were offering 3.5%-4% on FCNR(B) deposits with maturities of three to five years.
The decision to remove restrictions on NRE deposits will allow banks to offer higher rates on overseas deposits than on comparable domestic deposits.
“Both regulatory measures will technically allow banks to raise interest rates on overseas deposits further. However, it will depend on the respective bank’s appetite,” the head of a Kerala-based lender said.
Banks headquartered in southern states have traditionally been more active in tapping the Indian diaspora to mobilise deposits.