What changed
RBI replaced LIBOR with Overnight Alternative Reference Rates (ARR) as the benchmark for fixing FCNR(B) deposit interest rates. The interest rate ceiling for fixed-rate deposits is now based on ARR plus a spread, and the overall ceiling has been increased by 50 basis points for all tenors. FEDAI will publish the ARR temporarily to ensure a smooth transition.
What it means for you
Banks can now offer higher interest rates on FCNR(B) deposits, making them more attractive to NRI depositors. The shift to ARR removes reliance on the soon-to-be-discontinued LIBOR, reducing transition risks. However, banks must update their systems and product documentation to reference ARR instead of LIBOR.
What you must do
- Update FCNR(B) deposit product terms and system configurations to reference Overnight Alternative Reference Rates instead of LIBOR.
- Train treasury and operations teams on the new ARR-based ceiling calculation and the 50 bps spread increase.
- Monitor FEDAI publications for ARR rates until a permanent benchmark is established.
- Review and amend customer-facing documents and rate sheets to reflect the revised interest rate ceilings.
- Ensure compliance with the amended Master Direction sections for both scheduled commercial banks and co-operative banks.
Who it affects
Scheduled Commercial Banks (including RRBs), Small Finance Banks, Local Area Banks, Payment Banks, Primary (Urban) Co-operative Banks, District Central Co-operative Banks, State Co-operative Banks, NRI depositors holding FCNR(B) accounts
What is the new interest rate ceiling for FCNR(B) deposits of 1 to 3 years?
For deposits of 1 year to less than 3 years, the ceiling is Overnight Alternative Reference Rate (ARR) for the respective currency or Swap rate plus 250 basis points, up from the earlier LIBOR/Swap plus 200 bps.
Why did RBI replace LIBOR with ARR for FCNR(B) deposits?
LIBOR is being phased out globally as a benchmark rate. RBI adopted Overnight Alternative Reference Rates to ensure a smooth transition and maintain a reliable benchmark for pricing these deposits.
Will FEDAI continue to publish the reference rates?
Yes, FEDAI will publish the Overnight Alternative Reference Rate for each currency until a widely accepted benchmark is established, to address information asymmetry during the transition.