RBI allows banks to offer higher interest on NRI deposits to draw more foreign funds

Mumbai, June 17 (IANS) The Reserve Bank of India (RBI) on Wednesday temporarily eased interest rate curbs on certain non-resident deposits to enable banks to offer higher returns on fresh FCNR(B) and NRE deposits with the aim of attracting more overseas funds to prop up the country’s foreign exchange reserves and strengthen the rupee.

Under the relaxed rules that have been put in place till September 30, the RBI has withdrawn the interest rate ceiling on fresh Foreign Currency Non-Resident (Bank) deposits with maturities of more than three years and up to five years. It has also removed restrictions on interest rates offered on fresh Non-Resident External (NRE) deposits of three years and above.

However, the RBI said that transfers from Non-Resident Ordinary (NRO) accounts to NRE accounts would not qualify for the exemption.

Before the new rules were rolled out, banks were required to ensure that interest rates on NRE deposits did not exceed those offered on comparable domestic rupee term deposits. FCNR(B) deposits of three to five years were subject to an interest rate ceiling linked to the applicable overnight alternative reference rate or swap rate plus 350 basis points.

The move gives banks more freedom to offer higher interest rates to non-resident Indians, in order to mobilise more foreign-currency and rupee deposits from overseas investors and savers.

The measure also comes close on the heels of a series of steps that have been taken with a view to attracting foreign currency amid soaring oil prices in the global market and the exit of foreign funds from the Indian stock markets, which had led to a drawing down of the country’s foreign exchange reserves and weakened the rupee.

Earlier this month, the RBI allowed all foreign individual investors to directly purchase shares in listed Indian companies, expanding access beyond non-resident Indians and overseas citizens of India. The move followed changes to foreign exchange rules that offered more investment opportunities to NRIs.

The central bank also introduced a special swap facility that absorbs much of the hedging costs usually borne by banks. As a result, several private and public banks have passed on this benefit to customers, significantly hiking their dollar-denominated FCNR deposit rates (with some lenders offering between 6 per cent and 7.10 per cent on eligible tenor.

–IANS

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