RBI Tightens the Reins on Overseas Fixed Deposits; Lock-Ins To Be Affected

India’s central bank, the Reserve Bank of India (RBI), is about to tighten rules under its Liberalised Remittance Scheme (LRS), and it’s specifically going after a growing loophole: foreign currency time deposits. This move is part of a broader push to prevent what's being called “passive wealth shifting” by Indian residents.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

A Closer Look at the Crackdown

Right now, Indian residents can send up to $250,000 abroad each year under LRS. The money can go toward education, travel, investing, buying property, and more. But here’s what’s triggered concern: a massive jump in foreign time deposits. Just in March, these deposits hit $173.2 million, way up from $51.6 million in February.

In response, RBI insiders say the bank is planning to ban time deposits with lock-in periods at overseas banks, whether opened directly or through proxies. This would close off a grey area that’s been letting people shift money abroad quietly.

Why This Matters: Protecting the Economy

India’s always taken a cautious route with capital flows, and for good reason. Even though the country’s forex reserves are solid, they’ve been under pressure, and the RBI doesn’t want silent outflows tipping the balance.

One senior official called this a “preventative move” that fits with India’s careful, step-by-step approach to managing cross-border money flows.

So, What’s Official? Not Much, Yet

As of now, the RBI and Finance Ministry haven’t made any formal announcements. But behind the scenes, talks are heating up. A broader overhaul of LRS is in the works, aimed at simplifying rules but also tightening them. Expect a formal update once the consultations are wrapped up.

What’s Still Allowed? Plenty

Importantly, the RBI isn’t shutting the door on all foreign investments. You can still use LRS funds for things like stocks, mutual funds, property, education, healthcare, and travel. The key difference? The new rules will target only those “park-and-earn” fixed deposits that don’t serve an immediate purpose.

The Bigger Picture: Fintech and Flow Shifts

Even though total remittances dipped slightly, down from $31 billion in FY23-24 to $30 billion this year, LRS remains a major channel for cross-border money movement. Much of the action happens in March, as people max out their remittance limits and wrap up tax planning.

Plus, with fintech making it easier than ever to invest globally, regulators are playing catch-up. Money can now cross borders with a few taps, and that convenience brings its own set of challenges.

Who’s Hit Hardest? High-Net-Worth and Retail Investors

These changes are likely to affect high-net-worth individuals (HNWIs) and regular investors who’ve been parking remittance funds in short-term overseas FDs. With those options potentially off the table, they may need to shift toward equities or mutual funds instead.

Wealth managers are already calling for a clear rollout and transition plan. Remember the late-2024 confusion when the IFSCA limited fixed deposit maturities in GIFT City? Nobody wants a repeat of that.

Striking a Balance: Oversight vs. Freedom

The RBI is walking a fine line: it wants to stop passive capital outflows without stifling legitimate investment. In fact, it’s also been expanding LRS options, like allowing foreign currency accounts in GIFT City for a wider range of uses, from insurance to education.

Critics say a complete ban on foreign FDs might be too blunt. Some suggest a better approach would be to limit the duration of foreign deposits, say, 180 days, and allow room for genuine use cases.

Zooming Out: India’s Strategy Fits a Global Pattern

India’s cautious stance isn’t unusual. Many countries with controlled capital accounts also restrict certain overseas investments to protect reserves and encourage domestic growth. The new RBI move echoes that mindset: active investments are in, passive deposits are out.

To be clear, foreign direct investment (FDI) and portfolio investments abroad remain unaffected. It’s only the passive, interest-bearing time deposits that are being shut down.

What You Should Expect Next

Get ready, once this policy is finalised, it’ll likely mean:

• Foreign currency time deposits abroad under LRS could be banned.
• Any unused remitted funds might have to be used or brought back within a certain period, maybe 180 days.
• Accounts like those in GIFT City could face new usage and duration rules.

Banks and investment platforms are already bracing for change, and once the final word comes, compliance updates will roll out quickly.

Bottom Line

The RBI is making a clear shift: it wants LRS to support active, purposeful use of capital, not passive stashing of wealth abroad. Yes, it’ll change how some people manage their remittances, especially HNWIs. But the big-picture goal is to protect India’s financial stability while keeping legitimate cross-border investments flowing.

So, if you’re using LRS to invest or pay for real needs overseas, you’re still good. Just don’t expect to quietly park your dollars in an overseas FD anymore.