RBI tightens norms for fixing interest rates on NRI deposits

The Reserve Bank of India (RBI) has tightened norms for banks fixing the interest rates on NRI (non-resident Indians) deposits.

This would primarily stop arbitrage opportunities arising out of the interest rate differentials, said bankers.

"It has been decided that in order to ensure uniformity and transparency, Foreign Exchange Dealers' Association of India (Fedai) would quote/display the Libor/swap rates, which will be used by banks in arriving at the interest rates on NRI deposits," the central bank said.

Some banks have represented that in the absence of any direction on how to set rates based on Libor/swap rates, banks are using different methods, sources and cut-off timings to decide the interest rates on NRE (non-resident external)/FCNR(foreign currency non-resident) (B) deposits, resulting in significant variation in interest rates offered to non-resident depositors.

"To tackle this discrepancy, the RBI has streamlined the rates on NRE deposits. The difference in NRE deposit rates has been very marginal. It falls in the range of 3-5 basis points. However, it makes a difference when a client transacts with large funds," said a senior banker.

This difference stems from the fact that banks use different Libor rates as the base. With the introduction of a benchmark, there would be a level-playing field among banks. Now it is up to a bank's quality of service to keep this business going, the banker added.

A notification released earlier in the week by the RBI had said Fedai would publish the deposit rates for five maturities in six currencies on the last working day of each month.

"The first such rates would be indicated by Fedai for the last working day of February 2006," it said.

Banks have two deposits for expatriate Indians: NRE accounts and FCNR (B) accounts.

At present, banks accept deposits denominated in the US dollar, pound sterling, euro, Canadian dollar, Australian dollar and Japanese yen.

The interest rates on NRE deposits for one-three years are not allowed to exceed the Libor/swap rates plus 75 basis points. The rate on FCNR (B) deposits of one year and above is fixed at the Libor/swap rates for the respective currency minus 25 basis points.