The Reserve Bank of India has decided to allow banks to offer interest rates on FCNR (B) deposits using the widely accepted “Alternative Overnight Reference Rate (ARR)” for the respective currency; with an upward revision of the interest rate ceiling by 50 basis points (bps).
This is due to the imminent end of the LIBOR (London Inter-Bank Offered Rate) as the benchmark rate.
In order to deal with the information asymmetry during the transition, the Foreign Exchange Dealers Association of India (FEDAI) may publish the ARR until the widely accepted benchmark is established, the central bank said in a circular to banks.
The RBI has stated that the interest rate cap on FCNR (B) deposits of 1 year to less than 3 years will be overnight ARR for the respective currency / Swap plus 250bp against LIBOR / Swap more 200bp now.
In addition, the interest rate ceiling on FCNR (B) deposits of 3 years and more up to 5 years inclusive will be overnight ARR for the respective currency / Swap plus 350 bps against LIBOR / Swap over 300 bps now.
The Foreign Currency Account (Non-Resident) (Banks) program allows Non-Resident Indians (NRIs) and Persons of Indian Origin (PIO) to open a term deposit account (for terms of up to less 1 year and not more than 5 years) in India in any permitted currency, i.e. a freely convertible foreign currency.
These accounts can be held jointly in the name of two or more NRIs / PIOs. NRIs / PIOs may also hold such accounts jointly with a resident parent on an “old or surviving” basis (parent as defined in the Companies Act 2013).
The resident parent can operate the account as a proxy holder during the lifetime of the NRI / PIO account holder.
RBI has stated that the overnight ARR for the respective currency / swap rates shown / displayed by FEDAI will be used as a benchmark to arrive at the interest rates on the FCNR (B) deposit.