RBI to Tighten Overseas Remittance Rules, No More Lock-in FDs Abroad

According to a report by Reuters, the Reserve Bank of India (RBI) is gearing up to introduce new regulations to limit the use of funds sent abroad through the Liberalised Remittance Scheme (LRS). The central bank intends to prevent these funds from being used for foreign fixed deposits or other interest-earning accounts. This move is part of the RBI's efforts to safeguard India’s foreign exchange reserves and prevent the passive shifting of wealth from India to foreign jurisdictions.

RBI's Focus on Passive Capital Flight

The Reserve Bank of India is increasingly concerned about the growing use of LRS for what it calls "passive wealth shifting." This refers to the practice of sending money abroad and parking it in fixed deposits or other interest-earning foreign currency accounts, thus bypassing India's capital controls. According to sources, this kind of financial activity could pose risks to the country's forex reserves and lead to heightened volatility in the currency market.

The RBI’s proposed regulation aims to close these loopholes and discourage the misuse of the LRS route. The central bank's concern arises from the possibility that resident Indians may be using LRS to quietly transfer wealth abroad, undermining India's capital control regime and putting strain on foreign reserves.

Current LRS Guidelines and the New Restrictions

Under the current framework, the LRS allows resident Indians to send up to $250,000 abroad each financial year. The funds can be used for various legitimate purposes, including:

• Education
   
• Travel
   
• Investment in foreign stocks or bonds
   
• Medical treatment

However, the RBI now wants to curb the use of these funds for foreign fixed deposits or any other interest-generating schemes. The concern is that such funds could be locked away in foreign financial institutions, thereby limiting the liquidity of Indian capital.

Read More: RBI Tells Supreme Court It Has Set Guidelines to Track Realtors Use of Loan Funds! 

Preventing Loopholes in Remittance Systems

Sources close to the RBI have indicated that the central bank also plans to address potential loopholes in the LRS system. This could involve tightening regulations to ensure that funds are not channelled through different names or indirect routes, making it harder for individuals to evade the rules.

This tightening comes at a time when outward remittances have been rising steadily, contributing to a growing outflow of Indian capital. The RBI's concern is not just about capital flight, but also the potential for misuse by individuals looking to park their funds overseas without a legitimate purpose.

Impact of Rising Outward Remittances

The trend of rising remittances from India is not new. According to the RBI, foreign currency deposits made by resident Indians surged dramatically from $51.62 million in February 2025 to $173.2 million in March 2025. This spike is typical, as people seek to maximise their annual remittance limit or plan for taxes before the financial year ends.

Despite a slight drop in overall outward remittances in FY25 to nearly $30 billion from $31 billion in FY24, the levels remain historically high. The increase in remittances has been attributed to the growing role of fintech apps and the support of private banks, which have made it easier for Indian residents to send money abroad and invest globally.

What Does This Mean for Global Investments?

It is essential to note that the RBI’s revised rules will not impact genuine foreign investments allowed under the LRS framework. Investments in foreign stocks, mutual funds, or property will remain unaffected by these new regulations.

The primary goal of these changes is to better align the LRS with India's cautious approach to full capital account convertibility. By tightening these rules, the RBI seeks to prevent the passive export of wealth while ensuring that legitimate global investments continue to flow without hindrance.

Conclusion

The RBI’s plan to restrict the use of LRS funds for foreign fixed deposits marks a significant step in its efforts to protect India's foreign exchange reserves and maintain control over capital outflows. While the revised rules are aimed at reducing passive capital flight, they will not impact genuine investments or financial transactions made under the LRS scheme.

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