RBI for review of interest rates on NRI deposits

Interest rates on non-resident Indian (NRI) deposits is under review.

According to banking sources, the Reserve Bank of India (RBI) has called for a review of interest rates on NRI deposits in the wake of rising interest rates globally. Across the globe, central banks have gone ahead with a hike in their respective base rates.

In the last credit policy, the RBI had raised the reverse repo (erstwhile repo) rate by 25 basis points (one basis point is one hundredth of a percentage point) from 4.5 per cent to 4.75 per cent. Subsequently, it allowed banks to offer a spread of 50 basis points over six-month London inter-bank offered rate (Libor).

To nullify the arbitrage in interest rate differential between overseas currency and Indian rupee, the Reserve Bank of India since 2003 had effected four rounds of rate cuts on NRI deposit schemes.

The last cut was made with effect from close of business in India on April 17, 2004, when rates on NRE savings deposits was capped at Libor/swap rates for six-month maturity on US dollar deposits.

Subsequently, banks have witnessed a gradual reversal of flows in NRI deposits in addition to a slowdown in total accretion of deposits.

Outstanding NRI deposits declined to $31.7 billion as at end-September 2004, thereby coming down from $2.190 billion in April-September 2003 to a negative accretion of $1.250 billion in April-September 2004.

Even as rates are under review, there are two views on the issue of any change in rates.

According to sources, the concern is that on raising the spread over the Libor, there will be a huge inflow to the account which will impact money supply and, thus, have a bearing on the inflation rate.

The RBI is trying hard to bring down the inflation to the forecast of 6.5 per cent by the financial year end.

On the other hand, there is another view that NRI deposits "" being relatively longer term in nature "" will compensate for a possible outflow of portfolio investments which is expected following a hike in the US Fed rate.