The Reserve Bank of India authorised commercial banks to offer fresh NRI dollar deposits at yields up to 7.1%, a significant jump from the standard 3.5% rate. The move aimed to boost India's forex reserves by attracting foreign capital from Non-Resident Indians.
The RBI's terms stipulated that the higher yields apply only to fresh or matured capital—a restriction designed to prevent existing depositors from gaming the system. However, wealthy NRIs who locked funds at the old 4% rate just months earlier quickly realised the magnitude of foregone returns.
Facing the prospect of leaving money on the table, these clients began demanding that their banks allow them to prematurely "break" existing low-yield deposits and immediately "rebook" the same capital at the new 7.1% rate. This "break and rebook" strategy effectively exploits the regulatory gap between old and new deposit cohorts.
Under strict RBI compliance rules, breaking a term deposit prematurely triggers forfeiture of all accrued interest—a penalty that high-net-worth clients find unacceptable. Threatening to move their banking relationships and portfolios to competing institutions, these clients have put banks in an impossible position.
Indian commercial banks are now formally requesting the RBI to grant a temporary waiver permitting the break-and-rebook arbitrage without the standard penalty. The request exposes a classic tension: whether regulators should bend rules to retain premium clients or enforce contracts as written.
