The Reserve Bank of India (RBI) has cautioned banks that the rush to raise non-resident deposit rates may shrink their margins and erode profitability in the coming quarters. Top executives of public and private sector banks met RBI officials on Tuesday.
RBI had deregulated the interest rate on non-resident (external) rupee (NRE) deposit rates last month to help domestic banks attract deposits from markets abroad. The measure was part of RBI's efforts to stem volatility in the depreciating local currency. The rupee had depreciated almost 18 per cent between August 5 and December 15.
Soon after the rate deregulation, almost all banks increased their NRE term deposit rates, a few doing so more than once to stay ahead of competition. The war has seen many small and mid-sized private banks offering over 10 per cent interest on these deposits. Acording to RBI norms banks cannot offer a higher rate on NRE deposits than what they pay on domestic deposits of similar maturities.
