On July 18, 2012, Reserve Bank of India (RBI) vide  notifications RBI/2012-13/136 and 137, DBOD.Dir.BC. 29 and 30/13.03.00/2012-13 withdrew the discretion given to banks to allow the benefit of additional interest rate of one per cent per annum on NRE, NRO and FCNR (B) deposit accounts.

Banks in India offer benefit of additional interest of 1% to certain account holders being senior citizens and staff members – existing or retired, on Fixed Deposits (FD). This additional interest may also be extended to NRO, NRE and FCNR deposits of staff members of respective banks, whether existing or retired.

As per paragraph 4 and 5 of the directives enclosed to the circular DBOD.Dir.BC.49/13.03.00/2000-2001 dated November 4, 2000 and clarification dated May 13, 2005, interest rate including any additional interest should not exceed the ceiling stipulated by RBI in the case of NRE and FCNR deposits of staff members – existing or retired.

RBI increased the ceiling on FCNR deposits on May 4, 2012 and deregulated interest on NRE deposits on Dec 19, 2012  (please see my blog “15 Important changes related to NRI” for details).

Based on review of circulars, clarifications and notifications, RBI decided that banks should not allow the benefit of additional interest rate on any type of deposits of non-residents (NRI/PIO).

This notification will have effect only to NRI staff members (existing or retired) of respective banks (e.g. State bank of India employee for FD with SBI) as they will not get additional 1% interest rate on their deposits. Other FD holders are not affected except that psychologically, they will feel good as no one else can get higher interest rate now ;).