Interest rate ceiling on FCNR(B) deposits hiked to attract capital

Highlights:

• The Reserve Bank of India (RBI) has introduced several key measures to enhance financial inflows, support vulnerable sectors, and harness advanced technologies.

Revised Interest Ceilings on FCNR(B) Deposits:

Interest Ceiling Adjustment:

• For deposits of 1 to less than 3 years, the ceiling has been raised to the overnight Alternative Reference Rate (ARR) + 400 basis points (bps), up from 250 bps.
• For deposits of 3 to 5 years, the ceiling has been increased to ARR + 500 bps, compared to the previous limit of 350 bps.
• Effective Date: This adjustment is effective immediately and valid till March 31, 2025.
• This move is expected to make Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits more attractive, particularly for Non-Resident Indians (NRIs), bolstering foreign currency inflows.

External Inflows and Market Developments:

• Net FPI Inflows: Foreign Portfolio Investment (FPI) inflows for 2024-25 (April–December) stood at US$ 9.3 billion, driven mainly by investments in the debt segment.
• External Borrowings and Deposits: External commercial borrowings and non-resident deposits saw higher inflows compared to the previous fiscal year, indicating growing international confidence in India’s economic resilience.

Introduction of Secured Overnight Rupee Rate (SORR):

• To enhance transparency and credibility in interest rate benchmarks:
• SORR Benchmark: The Secured Overnight Rupee Rate (SORR) will be based on all secured money market transactions, including overnight market repo and TREPS (Tri-party Repo).
• Objective: The initiative aims to develop the domestic derivatives market and strengthen financial instruments tied to interest rate benchmarks.

Support for Agriculture:

• Acknowledging the rising costs of agricultural inputs and inflation:
• Collateral-Free Loan Limit Increase: The ceiling for collateral-free agriculture loans has been raised from ₹1.6 lakh to ₹2 lakh per borrower.
• Impact: This will ease credit access for small and marginal farmers, bolstering rural economic stability.

Embracing AI and Mitigating Risks:

• To leverage artificial intelligence responsibly:
• Framework for Responsible AI:
  • The RBI will set up a committee of experts to draft a Framework for Responsible and Ethical Enablement of AI (FREE-AI) in the financial sector.
  • This will address concerns like algorithmic bias, data privacy, and explainability.
• AI Solutions for Digital Fraud:
  • The RBI Innovation Hub (RBIH) in Bengaluru has developed MuleHunter.AI, an AI/ML-based model designed to detect and address mule bank accounts involved in fraudulent activities.

Prelims Takeaways

• Interest rate ceilings on FCNR(B) deposits.
• Secured Overnight Rupee Rate (SORR)