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| NRIs are also investing in savings account which offer 3.5 per cent interest rate, much higher than the NRE deposit rates. |
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| The RBI on September 18 said the interest rates on fresh repatriable NRE deposits for one to three years should not exceed 25 basis points above the Lodon inter-bank offered rate (Libor) or swap rates for US dollar of corresponding maturity. |
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| This is the third time in the last three months that RBI has cut interest rates on NRE deposits. |
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| On July 17 it had pegged the rate at 250 basis points above Libor. Subsequently, o September 25, it bought this down to 100 basis points over Libor. |
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| The objective was to bring the rates of NRE and FCNR(B) deposits - two liability instruments for the NRIs offered by banks - on a par. |
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| It has brought it down further to ward off arbitrage opportunity which has risen following forwards premiums trading either at a discount or at a very slender premium. |
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| With six-month Libor now veering at around 1.30 per cent, the deposit rate will work out to a shed over 1.50 per cent. |
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| With six-month forwards trading at a few basis points now, the net interest income for an NRI on NRE deposits on a fully hedged basis will be close to 1.5 per cent. |
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| Earlier, even though NRI deposits were offering 2.23 per cent or so (that is 1 per centage point over Libor), the net interest income was around 1.50 per cent only taking into account the cost of six-month forwards. |
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| Sources point out that mutual funds had in the last one month aggressively wooing the NRE money following the redemption of Resurgent India Bonds on October 1. |
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| Most of the money market and debt funds are offering interest rates over 4.5 per cent - much higher than the NRE deposit rates. |
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| Money market funds are one of the safest instruments in the system which offer a higher interest rates than the NRE fixed deposits. |
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| Senior bankers also added that there has been an added inflow into the savings banks account as customers get an interest rate of 3.5 per cent. |
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| The RBI has continuously been paring the NRE deposit rates to check the flow of hot money. It is comfortable with trade inflows but wants to restrict the capital flows. |
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| At present, NRIs as well as foreign institutional investors (FIIs) are allowed to invest in mutual funds both on a repatriable as well as on a non-repatriable basis. |
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| NRIs are required to use money in their NRE and FCNR(B) accounts to invest on a repatriable basis. They can also take the inward remittance route to invest in mutual funds. |
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