Interest rate ceiling on FCNR(B) deposits hiked to attract capital

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Last Updated09/12/2024

Banks are permitted to raise fresh FCNR(B) deposits of 1 year to less than 3 years maturity at rates not exceeding the ceiling of overnight Alternative Reference Rate (ARR) plus 400 bps as against 250 bps at present.

The Reserve Bank of India (RBI) has introduced several key measures to enhance financial inflows, support vulnerable sectors, and harness advanced technologies.

For deposits of 1 to less than 3 years, the ceiling has been raised to the overnight Alternative Reference Rate (ARR) + 400 basis points (bps), up from 250 bps.
For deposits of 3 to 5 years, the ceiling has been increased to ARR + 500 bps, compared to the previous limit of 350 bps.
Effective Date: This adjustment is effective immediately and valid till March 31, 2025.
This move is expected to make Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits more attractive, particularly for Non-Resident Indians (NRIs), bolstering foreign currency inflows.

Net FPI Inflows: Foreign Portfolio Investment (FPI) inflows for 2024-25 (April–December) stood at US$ 9.3 billion, driven mainly by investments in the debt segment.
External Borrowings and Deposits: External commercial borrowings and non-resident deposits saw higher inflows compared to the previous fiscal year, indicating growing international confidence in India’s economic resilience.

To enhance transparency and credibility in interest rate benchmarks:
SORR Benchmark: The Secured Overnight Rupee Rate (SORR) will be based on all secured money market transactions, including overnight market repo and TREPS (Tri-party Repo).
Objective: The initiative aims to develop the domestic derivatives market and strengthen financial instruments tied to interest rate benchmarks.

Acknowledging the rising costs of agricultural inputs and inflation:
Collateral-Free Loan Limit Increase: The ceiling for collateral-free agriculture loans has been raised from ₹1.6 lakh to ₹2 lakh per borrower.
Impact: This will ease credit access for small and marginal farmers, bolstering rural economic stability.

To leverage artificial intelligence responsibly:
Framework for Responsible AI:
- The RBI will set up a committee of experts to draft a Framework for Responsible and Ethical Enablement of AI (FREE-AI) in the financial sector.
- This will address concerns like algorithmic bias, data privacy, and explainability.
AI Solutions for Digital Fraud:
- The RBI Innovation Hub (RBIH) in Bengaluru has developed MuleHunter.AI, an AI/ML-based model designed to detect and address mule bank accounts involved in fraudulent activities.