MUMBAI (Diya TV) — India’s central bank is tightening rules under the Liberalised Remittance Scheme (LRS) to curb what it sees as misuse of overseas remittances. The Reserve Bank of India (RBI) plans to ban resident Indians from parking funds in foreign currency deposits with lock-in periods, two senior government officials told.
The move comes amid concerns that some residents are using remittance channels to shift wealth abroad passively. These funds often land in time deposits or interest-bearing accounts outside India, which the RBI views as a red flag in its tightly controlled capital regime.
“This is akin to passive wealth shifting, which is a red flag for the RBI in a still-controlled capital regime,” one source familiar with the central bank’s internal discussions told.
The RBI, in consultation with the government, is now working to amend rules that fall under the LRS, which currently allows resident individuals to remit up to $250,000 annually. Funds can be used for education, travel, investments, and medical needs. However, placing that money in fixed foreign deposits is expected to be restricted, even if attempted under alternate names.
The move is preventive, according to the second source, and aims to plug loopholes as global investment access becomes easier through fintech platforms and private banks. These institutions have simplified cross-border transfers and global portfolio diversification for retail investors in recent years.
RBI data shows that foreign currency deposits under LRS surged to $173.2 million in March, up sharply from $51.62 million in February. March typically sees a spike as residents rush to use up their annual limits before the fiscal year ends, often with an eye on tax planning. However, the central bank fears that a chunk of this capital ends up “parked” rather than invested productively.
Although total outward remittances dipped slightly to $30 billion in FY 2024–25 from $31 billion the year prior, officials remain wary. The sources declined to disclose the total amount currently held in foreign currency accounts but said the coming rules are aimed at safeguarding India’s foreign exchange reserves and managing currency volatility.
India has long taken a cautious path toward full capital account convertibility. While equity, property, and mutual fund investments under LRS remain unaffected, the RBI sees time deposits abroad as passive capital export—an undesirable outcome for an economy still balancing growth with currency stability.
“The move addresses a growing misuse of the scheme as a vehicle for passive capital export,” the second source noted. “It also aligns the scheme more closely with India’s calibrated approach to capital account convertibility.”
This regulatory update is part of a broader legal overhaul of LRS that the RBI highlighted in its latest annual report. The aim is to simplify the framework while protecting against vulnerabilities arising from surging international transfers.
As of now, both the RBI and the Finance Ministry have declined to officially comment on the pending changes. However, insiders say the review is at an advanced stage and may soon be formalized.
Despite the coming restrictions, resident Indians can continue to use LRS for foreign education, medical treatments, international travel, and investing in foreign stocks or real estate. Only interest-bearing deposit instruments—especially those with lock-in periods—will be off-limits if the draft rules take effect.
