The Reserve Bank of India (RBI) announced on June 17 that it will temporarily withdraw the interest rate ceiling on fresh three- and five-year foreign currency non-resident bank (FCNR-B) deposits until September 30, 2026, as part of its review of deposit interest rate directives from 2025. The central bank also withdrew the restriction on interest rates on non-resident external (NRE) deposits of three-year tenors and above, including deposits that are renewed upon maturity, until September 30. These amendments came into effect immediately, with the RBI stating that interest rates on NRE or non-resident ordinary (NRO) deposits shall not be higher than those offered by the bank on comparable domestic rupee term deposits. For deposits of one year to less than three years, the ceiling rate will be 250 basis points (bps) above the overnight alternative reference rate, while for deposits of three years to five years, the ceiling rate can be 350 bps above the reference rate.
Bankers anticipate the Reserve Bank of India (RBI) will release detailed FAQs (frequently asked questions) to clarify regulations and address concerns about high interest FCNR-B deposits, as reported by The Hindu BusinessLine. Non-resident Indian (NRI) customers are querying whether their balances in non-resident ordinary (NRO) and non-resident external (NRE) deposits can be routed into FCNR-B deposits, which are now fetching attractive interest rates of 6-7 percent. Bankers have their own concerns regarding premature closure of NRI deposits in the backdrop of fresh FCNR-B dollar deposits offering higher interest rates. The regulatory ambiguity around offering leverage on FCNR-B deposits has emerged as a key concern, with some banks offering nine times the deposit amount to NRI customers maintaining minimum $1 million FCNR-B deposits through overseas branches.
India's central bank is not looking to enable direct settlement of government securities via offshore settlement platforms like Euroclear -- one of the world's largest securities settlement systems -- despite recent tax changes aimed at attracting foreign investors, according to reports from The Economic Times and Business Standard. The Reserve Bank of India (RBI) wants overseas investors to participate directly on the domestic Negotiated Dealing System-Order Matching (NDS-OM) platform, an electronic system for secondary market trading in government bonds. This preference aims to consolidate liquidity and enhance price discovery in the domestic market. As per Business Standard, three sources familiar with the matter confirmed that the RBI is not in favour of offshore settlement for government bonds, with one source explaining that "Let all liquidity be on NDS-OM and let foreigners participate on NDS-OM. If we allow global clearing platforms, it will fragment liquidity."
India has gradually opened up its bond markets to foreign investors over the last six years, by creating a pool of securities with no foreign investment limits and more recently by scrapping taxes on capital gains for overseas investors in these securities, as reported by The Economic Times. Despite these tax incentives, the central bank still prefers settlement via the local clearing corporation due to better price discovery and ease of buying and selling. Since India's decision to remove taxes on foreign investment in government securities on June 5, Indian bonds have drawn $2 billion from overseas investors, compared with $1.6 billion in the first five months of the year. The RBI had previously explored allowing settlement through offshore platforms to expand the foreign investor base for local currency debt, at a time when overseas interest was subdued, but these discussions didn't take off due to capital gains tax and withholding tax imposed on these securities.
Last year, financial technology firm MarketAxess launched an electronic trading platform allowing foreign investors to directly trade Indian government securities, according to The Economic Times. The system is linked to the Clearing Corporation of India's NDS-OM platform through a plug-in model, enabling foreign and domestic investors to trade together. Alongside MarketAxess, Bloomberg is also in the process of linking to the NDS-OM platform, sources said. A Bloomberg index committee is due to review India's entry into a wider global bond index this month. The sources declined to be identified as they are not authorised to speak to the media, while the Reserve Bank of India did not respond to a request for comment and a spokesperson for Euroclear declined to comment.
