FCNR (B) Accounts interest rates on deposits during LIBOR transition: RBI advises banks to use ARR

Edited on December 6, 2024

With the expectation that the publication of the London Interbank Offered Rate (LIBOR) as a benchmark rate will cease by the end of 2021, RBI permitted banks to offer interest rates on FCNR (B) deposits using the widely accepted ‘Overnight Alternative Reference Rate (ARR)* for the respective currency’ with upward revision in the interest rates ceiling by 50 bps.

[*LIBOR rates were announced for ten currencies in 15 maturity terms ranging from overnight to one year. The LIBOR is a combination of interbank rates comprising credit risk premia, term premia, and liquidity premia. As against this, ARRs are overnight benchmark rates, which lack a term structure and a credit risk component.]

‘As a measure to handle the information asymmetry during the LIBOR transition, FEDAI may publish the ARR till such time the widely accepted benchmark is established’, RBI said.

Accordingly today (11.11.2021) RBI advised the following amendments to sections 19 & 18 of the master circular to all the banks (Section 18 of the Master circular applies to cooperative Banks)

Sec 19d: Interest on floating rate deposits shall be paid within the ceiling of swap rates for the respective currency/ maturity and in case of fixed-rate deposits, interest shall be paid within the ceiling of Overnight Alternative Reference Rate for the respective currency/ maturity.

Sec 19(f): The Overnight Alternative Reference Rate for the respective currency /SWAP rates as on the last working day of the preceding month shall form the base for fixing ceiling rates for the interest rates offered effectively in the following month.

19h: The Overnight Alternative Reference Rate for the respective currency / Swap rates quoted/displayed by the Foreign Exchange Dealers Association of India (FEDAI) shall be used as the reference for arriving at the interest rates on FCNR (B) deposits.

With effect from December 6, 2024, to March 31, 2025, the interest rate ceiling on FCNR (B) deposits shall be as under:

Amendments to sections 18d, 18f, and 18h in respect of the period of deposits and ceiling rate applicable to cooperative banks are also as stated in sec19 d, sec 19f, and 19h.

In July, to deal with the emerging situation, the RBI asked banks and financial institutions to “cease entering into new financial contracts that reference LIBOR as a benchmark and instead use any widely accepted alternative reference rate (ARR), as soon as practicable and in any case by December 31, 2021. The RBI has also advised financial institutions to cease using the Mumbai Interbank Forward Outright Rate (MIFOR), a benchmark that references the LIBOR, by December 31, 2021.
“It is, therefore, expected that contracts referencing LIBOR may generally be undertaken after December 31, 2021, only to manage risks arising out of LIBOR contracts (e.g. hedging contracts, novation, market-making in support of client activity, etc.), contracted on or before December 31, 2021,” the RBI said.