Key facts
- Wealthy Indian residents are using the Liberalised Remittance Scheme (LRS) to send funds to NRI relatives as gifts.
- This strategy aims to indirectly invest in Foreign Currency Non-Resident (FCNR) deposit schemes.
- The goal is to capitalize on high, tax-free dollar returns.
- This strategy is similar to ones used in 1998 and 2013.
- Indian banks are offering up to 7.1% interest on dollar deposits to NRIs.
- The aim is to attract over $50 billion in deposits.
- State Bank of India (SBI) has revised its FCNR(B) interest rates up to 5.75% per annum.
- These rates are for NRIs, Overseas Citizens of India, and Persons of Indian Origin.
- The RBI will bear hedging costs for certain deposit maturities.
Wealthy Indian residents are reportedly leveraging the Liberalised Remittance Scheme (LRS) to channel funds to their Non-Resident Indian (NRI) relatives as 'gifts'. This tactic enables indirect participation in lucrative Foreign Currency Non-Resident (FCNR) deposit schemes, seeking to benefit from high, tax-free dollar returns. This approach mirrors similar strategies employed by India in 1998 and 2013.
In parallel, Indian banks are actively seeking to attract NRI investment by offering competitive interest rates on dollar deposits, with some rates reaching up to 7.1%. The primary objectives of this initiative are to bolster the nation's foreign exchange reserves and provide support to the Indian rupee. This strategy is reminiscent of measures taken in 2013 and aims to attract over $50 billion in deposits.
State Bank of India (SBI), a major financial institution, has also adjusted its Foreign Currency Non-Resident (Bank) or FCNR(B) deposit interest rates. SBI is now offering rates as high as 5.75% per annum for NRIs, Overseas Citizens of India (OCI), and Persons of Indian Origin (PIO). This revision by SBI comes in the wake of the Reserve Bank of India's (RBI) announcement that it will bear the hedging costs for certain deposit maturities, making these instruments more attractive.
The RBI's decision to absorb hedging costs is a significant factor in making these dollar deposit schemes more appealing to both banks and depositors. This move is intended to encourage a greater inflow of foreign currency into the country, thereby strengthening the rupee and improving the overall balance of payments.