Finance
The Reserve Bank of India on Friday took a significant step by announcing an increase in the interest rate caps on the foreign currency deposits of the Indian diaspora. This move is aimed at attracting more capital flows at a time when the rupee is facing pressures. In the fifth bi-monthly monetary policy for the current financial year, RBI Governor Shaktikanta Das stated that the interest rate ceilings on Foreign Currency Non-Resident Bank deposits or FCNR (B) deposits have been raised according to different tenors. It is important to note that this decision comes at a time when the rupee has been hitting lifetime lows against the dollar, and the RBI seems to be deploying forex reserves to manage the volatilities. Over the last few weeks, there has been a sharp fall in the forex kitty. Starting from Friday, banks are now permitted to offer higher interest rates on fresh FCNR (B) deposits. For deposits with a maturity of 1 year to less than 3 years, the rate can be up to the Overnight Alternative Reference Rate (ARR) plus 400 basis points, instead of 250 basis points earlier. Similarly, for deposits with a maturity between 3 to 5 years, the interest can be ARR plus 500 basis points, as opposed to the 350 basis points ceiling earlier. This relaxation will be available only till March 31 next year. Madhavi Arora, the chief economist at Emkay Global Financial Services, believes that this is a tacit attempt to tap other sources of foreign capital flows, which could provide the RBI with some breathing room and reduce its need for forex intervention. India, being the largest beneficiary of remittances in the world, has introduced more attractive deals for NRI deposits in previous episodes when the rupee was under pressure. Das also mentioned that the rupee has depreciated by 1.3 per cent mainly due to the strengthening of the US dollar and selling pressure from foreign portfolio investors in October and November. He added that the volatility in the rupee has been less compared to peer emerging markets. Stressing that the RBI's exchange rate policy remains consistent to let the markets determine the levels, Das said that forex reserves are used judiciously to mitigate undue volatility, maintain market confidence, and preserve overall financial stability. Meanwhile, on Friday, the Governor also announced an expansion in the reach of the forex-Retail Platform through linkages with Bharat Connect. With the objective of bringing greater transparency and fairness in the pricing of foreign exchange for users, especially individuals and MSMEs, the Clearing Corporation of India Limited (CCIL) launched the FX-Retail platform in 2019. Presently, the FX-Retail platform is accessible through an internet-based application, and it is proposed to facilitate its linking with Bharat Connect operated by the NPCI Bharat Connect.
