Ceiling on NRE deposit interest rates hiked by 25 basis points

MONETARY POLICY 2006-07

Rise in tandem with the rates on other foreign currency deposits.

In order to realign interest rates on non-resident external (NRE) deposits with the rising global interest rates, the Reserve Bank of India (RBI) has hiked the ceiling on interest rate on NRE deposits.

The cap on interest rate on NRE deposits has been raised by 25 basis points (bps) to 100 basis points over Libor (London interbank offered rate).

One basis point is one hundredth of one per cent and Libor is the international interest rate benchmark. NRE deposits are rupee-denominated deposits raised from NRIs.

The rates have been hiked in tandem with the interest rate on other foreign currency deposits "" foreign currency non-resident bank deposits (FCNR(B)). The RBI last month raised the ceiling on FCNR(B) deposits by 25 bps to Libor from 25 bps below Libor. At present, the benchmark rate of six month Libor is ruling around 5.22.

According to banking sources, since global interest rates have moved up substantially, the scope of arbitrage in interest rates between overseas markets and India has come down. Also, banks might have witnessed a flight of deposits to other countries if the rates were not increased.

The ceiling on NRE deposit interest was brought down in three tranches since September 2003 from 250 bps above Libor to a low of 25 bps above Libor.

The objective was to narrow down the interest rate differential between the rates offered in the international market and domestic market.

A senior public sector banker said, "All interest rates need to be market-determined. Previously, foreign exchange inflows used to be substantial. But in the recent past, these inflows have experienced a decline to the extent that the accretion to forex reserves this year has been 40 per cent lesser than that in 2004-05. To facilitate a significant build-up of these reserves on the NRI segment, the RBI has now decided to relax the caps on these inflows."