Tag: ARR

Banks allowed to offer interest rate on FCNR (B) deposits linked to ARR

Banking & Finance

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The Reserve Bank of India has decided to permit banks to offer interest rates on FCNR (B) deposits using widely-accepted ‘Overnight Alternative Reference Rate (ARR) for the respective currency’ with an upward revision in the interest rates ceiling by 50 basis points (bps).

This comes in view of the impending discontinuance of LIBOR (London Inter-Bank Offered Rate) as a benchmark rate.

As a measure to handle the information asymmetry during the transition, the Foreign Exchange Dealers Association of India (FEDAI) may publish the ARR till such time the widely-accepted benchmark is established, the central bank said in a circular to banks.

The RBI said the interest rates ceiling on FCNR (B) deposits of 1 year to less than 3 years shall be overnight ARR for the respective currency / Swap plus 250 bps against LIBOR/ Swap plus 200 bps now.

Further, the interest rates ceiling on FCNR (B) deposits of 3 years and above up to and including 5 years shall be overnight ARR for the respective currency / Swap plus 350 bps against LIBOR/ Swap plus 300 bps now.

Foreign Currency (Non-Resident) Account (Banks) scheme allows non-resident Indians (NRIs) and Person of Indian Origin (PIO) to open a term deposit account (for terms not less than 1 year and not more than 5 years) in India in any permitted currency — that is a foreign currency which is freely convertible.

Such accounts may be held jointly in the names of two or more NRIs/ PIOs. NRIs/ PIOs can also hold such accounts jointly with a resident relative on ‘former or survivor’ basis (relative as defined in Companies Act, 2013).

The resident relative can operate the account as a Power of Attorney holder during the life time of the NRI/ PIO account holder.

RBI said the overnight ARR for the respective currency / Swap rates quoted/ displayed by FEDAI shall be used as the reference for arriving at the interest rates on FCNR (B) deposit.

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Banks get RBI nod to use any other ARR in place of LIBOR

Banking & Finance

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The Reserve Bank of India (RBI) has permitted banks, which are authorised to deal in foreign exchange, to use any other widely accepted/alternative reference rate (ARR) in place of the London interbank offered rate (LIBOR) for interest payable in respect of export/import transactions.

The central bank has issued a circular in this regard to authorised dealer banks in view of the impending cessation of LIBOR as a benchmark rate.

RBI Governor Shaktikanta Das, in a statement on August 17, observed that the transition away from LIBOR is a significant event that poses certain challenges for banks and the financial system. “The Reserve Bank has been engaging with banks and market bodies to proactively take steps. The Reserve Bank has also issued advisories to ensure a smooth transition for regulated entities and financial markets,” Das said.

Also read: LIBOR transition will be a complex exercise

Banks will be permitted to extend export credit in foreign currency using any other widely accepted ARR in the currency concerned, he added. Since the change in reference rate from LIBOR is a “force majeure” event, banks are also being advised that change in reference rate from LIBOR/ LIBOR related benchmarks to an ARR will not be treated as restructuring, the Governor then said.

On June 8, 2021, the RBI had advised banks and other regulated entities to cease entering into new contracts that use LIBOR as a reference rate and instead adopt any ARR as soon as practicable and in any event by not later than December 31, 2021.

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