India’s central bank is preparing to tighten regulations around the way resident Indians remit money overseas, particularly aiming to ban the use of such remittances to create foreign currency deposits with fixed lock-in periods. According to two government sources, the Reserve Bank of India (RBI) is planning to update the rules to ensure that overseas transfers are not being misused to establish interest-earning time deposits abroad.
One of the sources familiar with the RBI’s thinking stated, “This is akin to passive wealth shifting, which is a red flag for the RBI in a still-controlled capital regime.” The RBI is particularly concerned about the growing trend of individuals moving wealth abroad through seemingly legal channels, which could have long-term implications on India’s financial stability and capital controls.
This proposed change underscores India’s cautious approach towards rising outward remittances and the broader topic of full rupee convertibility. Authorities are striving to both protect the country’s foreign exchange reserves and control fluctuations in the currency market, the sources explained.
At the heart of this issue is the Liberalised Remittance Scheme (LRS), a framework established by the central bank that permits resident Indians to remit up to $250,000 annually for various purposes. These include foreign education, travel, investment in equities and debt instruments, and medical treatments. Over time, the scope of activities allowed under the LRS has expanded, but the RBI now believes that certain areas, especially foreign currency deposits, require tighter oversight.
While the proposed changes are still being discussed with the government, the second source said that the central bank is keen to ensure that such deposits cannot be made even through indirect or alternate arrangements. “The move addresses a growing misuse of the scheme as a vehicle for passive capital export,” the second source noted.
This measure forms part of a broader review of the legal architecture that governs the LRS, with the goal of making the regulations more streamlined and effective. The RBI had identified this legal overhaul as a priority in its latest annual report, indicating that reforms are due not just for control, but also for clarity and administrative efficiency.
Recent RBI data adds urgency to the central bank’s concerns. Deposits made under the outward remittance route by individuals saw a dramatic jump, increasing from $51.62 million in February to $173.2 million in March. This timing coincides with the end of the financial year, when many individuals seek to maximize their annual remittance limits and structure their finances to optimize tax burdens.
Although such surges in March are typical due to these financial planning reasons, the RBI fears that some of the funds may not be genuinely intended for approved use. Instead, they may be quietly parked abroad in deposit accounts, which defeats the purpose of the remittance scheme and could represent capital flight in disguise.
For the financial year 2024-25, total outward remittances under the LRS declined slightly to about $30 billion, compared with $31 billion in the previous year. While the dip is minor, the overall volume remains substantial, maintaining the RBI’s concern about potential misuse of the framework.
The government sources did not provide specific figures on how much of this money is currently held in foreign currency deposit accounts, but emphasized that the intention behind the revised rules is preventative in nature. By closing off this route now, the central bank hopes to stop potential loopholes before they are exploited further.
India’s rising remittances under the LRS can be partially attributed to the increasing ease with which retail investors can access international markets. Fintech platforms and private banks have played a significant role in making global investment options available to individual investors. However, this democratization of investing also raises the risk of misuse, especially in the absence of strong regulatory checks.
“It also aligns the scheme more closely with India’s calibrated approach to capital account convertibility,” the second source added. The central bank has long taken a conservative stance on opening up the capital account fully. Allowing unrestricted outflows could lead to sudden depletion of foreign reserves or unwanted volatility in the rupee’s value.
The RBI’s efforts are aimed at reinforcing that the LRS is intended for genuine and productive purposes—such as funding education, travel, or regulated investments—not for stashing money abroad in passive income-generating accounts. The second source clarified that the impending restrictions would not impact legitimate investments in foreign equities, mutual funds, or real estate, which are still allowed under the scheme.
Despite the growing popularity of overseas investments among Indians, particularly the younger and more tech-savvy demographic, the RBI appears determined to maintain control over how capital moves across borders. The proposed changes aim to strike a balance between facilitating outward remittances for genuine needs and preventing financial strategies that might undermine India’s economic interests.
The finance ministry and the Reserve Bank of India have not commented publicly on these proposed changes, and both institutions declined to respond to email inquiries regarding the matter. The discussions remain confidential at this stage, with a formal announcement expected once the legal amendments are finalized.
Ultimately, the planned regulatory tightening highlights the RBI’s ongoing struggle to manage the challenges that come with increased financial globalization, while still operating within a framework that limits full capital account convertibility. With Indian residents becoming more financially sophisticated and eager to explore international options, the central bank is adapting its policies to ensure these freedoms are not misused.
As one source summed up, “The move is preventative.” It reflects a clear message from the RBI: India will allow outward remittances, but not at the cost of losing grip on the broader economic and monetary ecosystem.
