RBI Tightens Rules on Overseas Remittances to Stem Passive Capital Outflows

In a decisive regulatory shift, the Reserve Bank of India (RBI) is planning to tighten norms governing overseas money transfers by Indian residents. The proposed changes will specifically restrict foreign currency deposits involving lock-in periods, which the central bank views as a form of passive capital export, according to sources cited by Reuters.

The adjustments will apply to the Liberalised Remittance Scheme (LRS), which currently allows resident Indians to remit up to $250,000 annually for purposes such as education abroad, foreign travel, medical expenses, and investment in global stocks or real estate. The new restrictions will not impact genuine investments in foreign shares, mutual funds, or property, the officials clarified.

“This is akin to passive wealth shifting, which is a red flag for the RBI in a still-controlled capital regime,” an official familiar with the matter stated, signalling the bank’s concern over unchecked use of remittance routes for wealth parking in overseas interest-bearing instruments.

What’s Changing and Why?

The RBI is aiming to prohibit deposits into foreign currency fixed deposits and interest-bearing accounts, which currently fall into a regulatory grey zone under LRS. These are often used by high-net-worth individuals and global investors to move capital offshore while bypassing India’s more tightly monitored capital outflow frameworks.

According to central bank officials, some remitters are circumventing the rules by renaming such foreign deposits to mask their true nature. A second source noted: “The central bank, whilst in talks with the government, intends to implement measures preventing such deposits from being made under different nomenclatures.”

The move comes amid RBI’s broader effort to preserve foreign exchange reserves, dampen volatility in the rupee, and maintain gradual capital account liberalisation. India, unlike many advanced economies, does not allow full rupee convertibility, and the central bank is keen to ensure capital flows remain transparent and accountable.

Alarming Surge in Passive Deposits

Recent data from the RBI’s monthly bulletins show a startling increase in foreign currency deposits under LRS—from $51.62 million in February 2025 to $173.2 million in March 2025. March typically sees a surge in remittances as individuals rush to exhaust their annual remittance quotas before the fiscal year-end, but the scale of passive deposits has raised red flags.

While total outward remittances for FY 2024–25 stood at around $30 billion, slightly down from $31 billion in FY 2023–24, the growing portion allocated to interest-earning offshore accounts rather than active investments or essential expenses has triggered policy alarm.

“The move addresses a growing misuse of the scheme as a vehicle for passive capital export,” said one of the officials. “It also aligns the scheme more closely with India’s calibrated approach to capital account convertibility.”

No Impact on Legitimate Investments

Importantly, the proposed changes will not affect legitimate foreign investments in equity, debt instruments, real estate, or mutual funds. Indian individuals investing in global markets through licensed brokers and banking channels will continue to enjoy access under existing LRS provisions.

The clampdown is instead directed at discouraging interest-seeking fund transfers that do not contribute to the productive economy—an area the central bank believes could undermine the integrity of India’s remittance regime.

Industry and Market Reaction

Fintech firms and private banks facilitating international investment products for retail clients may need to revise their product offerings. Several of these entities have been actively promoting overseas deposits as part of wealth diversification strategies, often skirting the boundary between active investing and passive parking.

Banking analysts believe the move is timely, particularly as global interest rate differentials tempt Indian investors to shift idle funds abroad for marginal gains. “With inflation under control and interest rates stabilising, the RBI is rightly focusing on capital flow quality rather than quantity,” said a Mumbai-based economist.

While the implementation timeline for the new rules remains unspecified, the RBI is expected to formalise the amendments in the coming quarter, pending government consultations. The central bank is also revisiting its Annual Report guidance, where it had called for tightening loopholes in LRS without compromising legitimate remittance freedom.

As India seeks to balance global integration with financial discipline, the new LRS controls underscore the importance of guarded liberalisation—especially at a time when volatile capital flows can endanger currency stability and national economic security.