On Friday, the Reserve Bank of India increased the maximum interest rates that banks can offer on Foreign Currency Non-Resident (FCNR-B) deposits to encourage greater inflows of foreign exchange as the currency continues to reach record lows.

FCNR-B accounts are term deposits that non-resident Indians (NRIs) can open in foreign currencies. These accounts shield depositors from exchange rate risks since they are maintained in foreign currency, making them an appealing option for NRIs.

The central bank has historically utilised this measure during periods of pressure on the Rupee, such as in July 2013, when the currency faced challenges due to India's weak macroeconomic fundamentals. 

More recently, the RBI implemented similar relaxations in July 2022. 

According to RBI Governor Shaktikanta Das in his monetary policy statement, banks are now authorised to accept new FCNR-B deposits with maturities ranging from 1 year to less than 3 years at interest rates up to 400 basis points above the relevant reference rate, Reuters reports.

For deposits with maturities between 3 and 5 years, banks can now offer interest rates up to 500 basis points above the relevant reference rate. For both maturity ranges, this represents an increase of 200 basis points from the current permissible limits.

The decision would have been made “weighing the cost of heavy FX intervention in the past two months,” according to Madhavi Arora, lead economist at Emkay Global.

The central bank is estimated to have sold $35-40 billion in the spot and forward segments of the forex markets over the past two months while simultaneously accumulating approximately $60 billion in short Dollar/Rupee positions in the non-deliverable forwards market, Arora added.

The Rupee has been under pressure from various factors, including apprehensions about incoming US President Donald Trump's tariff policies, portfolio outflows, a decline in Asian currencies, and slowing domestic growth, all of which have weighed on the Indian currency.

It fell to an all-time low of 84.7575 against the US Dollar on Tuesday before recovering slightly to 84.6200. 

Mandar Pitale, head of treasury at SBM Bank India, expressed scepticism about the effectiveness of the RBI's measures in significantly supporting the Rupee.

“Don't think there will be significant accretion of FX deposits as a result of this measure,” he said.

“It may benefit banks who already have organic demand for such deposits but others can raise funds more cheaply in the local market so they are unlikely to exercise the raised ceiling.”