Mumbai's financial landscape has seen significant changes as the Reserve Bank of India (RBI) takes action on JPY-linked special deposits. Once a popular tool for attracting NRI funds, these deposits were marketed as premium rupee plans (PRPs), offering high returns by leveraging the forward premium on the Japanese yen. Banks, like IndusInd Bank and Yes Bank, had been using these products to attract NRI deposits by offering high yields based on the yen's forward premium in the foreign exchange market. However, the RBI has recently instructed banks to align interest rates on such deposits with real market conditions, forcing banks to scale down their offerings.

Yes Bank has already reduced interest rates on its JPY-linked deposits from over 2% to less than 0.4%. The mechanism behind these deposits allowed banks to pay NRIs higher returns by locking in favorable exchange rates in advance and capitalizing on the yen's premium. However, this model, which appeared cost-efficient on paper, was disconnected from actual market dynamics, raising concerns for the RBI about the sustainability of such offerings. Regulators are worried that the over-generous returns, which were not fully reflective of the actual cost of funds, might distort the broader financial market and lead to unsustainable practices.

As the RBI increases oversight on JPY-linked special deposits, banks may shift their focus to other foreign currencies like the US dollar for similar schemes. While the PRP framework will remain in place, the once-attractive yen-linked deposits are likely to lose their appeal. This move signals a broader effort to ensure that financial products for NRIs are more transparent and in line with market realities. It also represents a crucial step toward ensuring long-term sustainability in the banking sector, protecting both institutions and depositors from overly aggressive or misleading deposit schemes.