RBI slashes rates on NRE deposits

The Reserve Bank of India (RBI) on Saturday slashed the interest rate on NRI deposits to kill arbitraging on interest rate differential between the US dollar and the Indian rupee and stem the rise of rupee.

The measure was announced hours after the central bank's weekly data showed that the country's foreign exchange reserves have gone up by $3.37 billion to $116.06 billion in the week ended April 9.

This is the highest ever reserve piled in a week. In its third round of cut on NRI deposits, since September 2003, the RBI said the interest rates on non-resident (external) rupee (NRE) deposits for one to three years from April 18 should not exceed the London Inter-bank offered rate (Libor)/Swap rates for the US dollar of corresponding maturity. Till now it was 25 basis points over Libor.

Under the NRE scheme, deposits are received in foreign currency and converted into rupees, and converted back into foreign currency on maturity. The interest rates on NRE deposits were first linked to Libor/swap rates for the US dollar from July 17 last when the ceiling was fixed at 250 basis points.

It was cut to 100 basis points on September 15 and was further lowered to 25 basis points above Libor/Swap rates on October 18. The fresh ceiling is effective from the close of business on April 17.

The central bank also said that rates offered on NRE savings deposits for expatriate Indians will also not exceed the Libor/swap rates offered on the US dollar deposits with a six-month maturity. These deposits will now offer a return of just around 1.3 per cent compared with 3.5 per cent earlier. One year Libor is now pegged at around 1.6 per cent and six-month at 1.28 per cent.