The central bank removed the cap on both fresh foreign currency non resident -bank (FCNR-B) deposits of three to five years and non-resident external (NRE) accounts of three years and above, including the deposits that are renewed upon maturity.
The direction comes into effect immediately and will remain valid till September 30, 2026.
“Banks facing challenges in building long term liabilities and maintaining liquidity buffers at threshold levels are likely to take advantage of the temporary removal of the FCNR(B) rate ceiling. With the cap lifted until September end, some banks may even offer rates of up to 8% to attract long tenor, granular and sustainable deposits that are accretive to Liquidity Coverage Ratio,” Karur Vysya Bank treasury head Rama Chandra Reddy told ET.
“The move will also support banks in strengthening their asset liability management (ALM) profile,” he added.
Banks have already raise FCNR-B deposit rates by 250-450 basis points in the past few days following the regulator’s decision to bear the hedging on foreign currency-linked deposit mobilisation and swap the dollar with it at par, allowing hefty cost savings for banks.
However, they could not raise the rates beyond 7.13% as there was a 350 basis point ceiling over the underlying alternate reference rate for dollars which was 3.63% applicable till end June.”As the cap will no longer be there till September-end, banks may raise the FCNR-B rates further to 8% or beyond. Some banks may be ready to offer the same rates as local deposits as foreign currency deposits will be for long term while the maturity period for local deposits are typically one to two years,” a senior executive with a public sector bank said.
Prior to the RBI move to bear the hedging cost, banks were offering 3.5% to 4% for three to five years FCNR B deposits.
The decision to remove the restriction on NRE deposits will allow banks to offer higher rates on overseas deposits than local deposits.
“Both the regulatory measures will technically allow banks to raise interest rates on overseas deposits further. However, it will depend on the respective banks’ appetite,” a head of a Kerala-based lender said.
Banks headquartered in the southern states are traditionally more active in tapping the Indian Diaspora to mobilise deposits.