The Reserve Bank of India (RBI) is preparing to tighten the rules governing international money transfers by Indian residents, particularly by introducing restrictions on foreign currency deposits that come with lock-in periods. The move is part of the central bank’s broader strategy to prevent misuse of overseas remittances and to maintain control over capital outflows in a still-regulated capital framework.
Under the current Liberalised Remittance Scheme (LRS), Indian residents are permitted to remit up to $250,000 annually for a wide range of purposes. These include funding overseas education, covering medical expenses abroad, travelling, and investing in international equity or debt instruments. However, according to an official who spoke to Reuters, the RBI plans to revise the existing guidelines to disallow the use of these international transfers for depositing funds into interest-earning overseas accounts or fixed deposits.
“This is akin to passive wealth shifting, which is a red flag for the RBI in a still-controlled capital regime,” the official stated. This concern highlights the central bank’s cautious stance on liberalising outward flows too quickly. The RBI remains wary of unregulated capital movements, especially those that could strain India’s foreign exchange reserves or lead to increased volatility in the rupee.
The proposed changes are also a reflection of India’s conservative policy on full rupee convertibility and its efforts to maintain macroeconomic stability. By imposing such restrictions, the central bank aims to ensure that outbound transfers are aligned with India’s broader economic priorities, particularly the safeguarding of its foreign exchange reserves and managing currency risks. As per sources, the RBI is currently in discussions with the government and is looking to enforce rules that would prevent such foreign deposits from being routed through alternate or disguised channels.
A second source familiar with the developments mentioned that the new rules will be designed to eliminate loopholes that allow individuals to park money abroad in interest-bearing accounts under different labels. The initiative will fall under the broader goal of enhancing the regulatory framework within the bounds of the LRS.
The RBI’s annual report had already outlined the need to streamline such regulations. This upcoming policy change is, therefore, an extension of the central bank’s declared objectives. The urgency of the matter is underscored by recent data. According to RBI figures, there was a notable rise in outward remittance deposits by individuals in March, which surged to $173.2 million—up significantly from $51.62 million in February.
Historically, March has been a high-activity month for outward remittances. Many Indian residents aim to use their full yearly remittance allowances before the fiscal year closes while also taking tax planning into account. Despite being a peak period, the surge has drawn attention to what the RBI perceives as the potential misuse of the scheme for passive fund parking.
Overall, outward remittances under the LRS during the financial year 2024–25 remained strong, although they showed a slight dip compared to the previous year. Total remittances stood at approximately $30 billion, marginally down from the $31 billion recorded during the previous financial cycle. Nevertheless, the volume of outbound flows remains substantial, reflecting growing participation from fintech platforms and private banks that offer international investment solutions to retail investors.
“The move addresses a growing misuse of the scheme as a vehicle for passive capital export,” said the second official. This observation reiterates the central concern of the RBI: that the scheme, originally meant for diverse and active uses, is increasingly being exploited to transfer wealth abroad in a passive manner that contributes little to productive activity.
The second official further emphasized that the new measures are meant to “align the scheme more closely with India’s calibrated approach to capital account convertibility.” This highlights the broader policy direction, wherein India opts for a gradual opening of its capital account rather than a sudden liberalisation, ensuring that systemic risks are mitigated.
Notably, the proposed restrictions will not apply to all foreign investments permitted under the LRS. According to the second official, authorised investments in overseas equity, mutual funds, or real estate will remain unaffected. This is in line with the RBI’s goal of supporting genuine international diversification by Indian investors while curbing activities that resemble passive capital flight.
India has long maintained a conservative view on the free movement of capital. This policy stance is primarily designed to shield the economy from external shocks and maintain confidence in the domestic currency. The RBI’s decision to tighten oversight of specific types of overseas remittances thus fits within this established framework. By narrowing the scope of permissible activities under LRS, the RBI aims to close gaps that can be exploited for non-productive capital movement.
The updated guidelines, once implemented, will compel Indian residents to reconsider their strategies for overseas fund placement. They will no longer be able to use the scheme as a backdoor route for depositing funds into foreign accounts merely to earn interest or secure other passive financial gains. This reorientation is meant to ensure that remittances are used for their intended, active purposes—such as education, healthcare, or equity investments—rather than serving as a tool for wealth relocation.
The anticipated move also reflects the RBI’s increased vigilance in the face of rising outward financial activity, especially as more Indians engage in cross-border investments. The participation of new-age platforms and the growing ease of remitting funds have made it more important for the regulator to update and enforce compliance measures that keep pace with evolving financial practices.
India’s capital account remains only partially convertible, and with foreign exchange reserves and currency stability being key pillars of macroeconomic strength, the central bank appears committed to taking every precaution. As the remittance ecosystem becomes more sophisticated, regulatory controls must evolve in tandem to preserve economic integrity.
In conclusion, the Reserve Bank of India’s planned restrictions on interest-bearing foreign currency deposits under the LRS underscore its intent to safeguard the country’s financial stability. By tightening regulations and closing existing loopholes, the RBI aims to promote more responsible use of the remittance scheme and ensure that outbound funds are channelled into legitimate, productive uses. The move is not expected to hamper foreign investments in equity, mutual funds, or real estate, which will continue to be permitted, but it will curb avenues for passive capital transfers that raise red flags under the current capital control regime.