RBI hikes interest rates on NRI foreign currency deposits

Why in the NEWS?

RBI has increased the interest rate cap on Foreign Currency Non-Resident Bank Deposits or FCNR (B) deposits.

Banks are now allowed to offer higher interest on all tenures.
This will help non-resident Indians to earn more on their savings.
The move is aimed at attracting more foreign capital at a time when the Indian rupee has come under pressure due to foreign investors pulling out funds from the Indian stock markets.
Now FCNR (B) deposits with tenure ranging from 1 year to less than 3 years have been allowed to be raised at short term Alternative Reference Rate (ARR) deposit rate of 4%.
Earlier this limit was 2.50%.
Similarly, deposits with maturity period of 3 to 5 years may be offered interest at ARR plus 5%.
Earlier this limit was 3.50%.
This exemption on FCNR will be available only till March 31, 2025.
RBI has also decided to introduce a benchmark, Secured Overnight Rupee Rate, based on the secured money market.
Financial Benchmarks India Limited is being requested to take forward the proposal.
This proposal is being taken in line with the recommendation of RBI's Committee on MIBOR Benchmark.
The Reserve Bank had constituted the Committee on MIBOR Benchmark under the Chairmanship of Ramanathan Subramanian to review the use of rupee interest rate benchmarks in the country, particularly MIBOR, and to examine the need for change to a new benchmark.

NRIs are citizens of India who live abroad for six months or more for employment, business, studies or any other reason.

FCNR is an abbreviation for Foreign Currency Non-Resident.
These are accounts where NRIs can keep their earnings in foreign currencies like USD or GBP.
USD- United States Dollar
GBP- Great Britain Pound
This protects them from exchange rate fluctuations.

It is an interest rate benchmark, which represents the average interest rate.
At this rate Indian banks borrow money from other banks in the interbank market.
It is used as a reference rate for various financial instruments including loans, bonds and derivatives.