RBI ups NRE deposit rates by 25 bps

MUMBAI: After giving the cold shoulder to NRIs for the past two years, the Reserve Bank of India (RBI) is trying to lure them with higher interest rates on deposits with Indian banks.

On Friday, the central bank hiked the ceiling on returns that banks can offer on non-resident external (NRE) rupee deposits ��� a move that is expected to improve liquidity and dollar supply by accelerating inflow of NRI funds in the banking sector.

The RBI has now allowed banks to offer a quarter percentage point more on NRE deposits than what was offered earlier. From now onwards, banks can offer a return of 75 basis points over the London inter-bank offered rate (Libor) for dollars, which is currently 4.58% for six months.

However, bankers say that prospective depositors will worry more about a depreciation in the rupee wiping out their gains.

According to Bhargav Dasgupta, head, international banking, ICICI Bank, the rates will not affect blue-collar workers in the Gulf as their remittances to deposits are fixed, irrespective of what the rates are. Big-ticket investors, who are generally swayed by the returns are more worried about the rupee���s fall.

���Given what has happened to the rupee in the past one month, big-ticket depositors will be more concerned about the rupee movement, rather than a 25 basis point benefit in interest rates,��� he said.

There is also uncertainty over how much of the $5.5bn raised by the State Bank of India (SBI) through India Millennium Deposits will be retained in India when the deposits mature next month. Mr Dasgupta said investors are likely to take a view by January when the trends will become clear.

JP Morgan has forecast that the rupee will depreciate to 46.5 against the dollar by end-March, which is 1.5% below current levels. If the currency does weaken to this extent, it will more than wipe out the gains arising due to a higher deposit rate.

The announcement of higher rates on NRE deposits boosted the rupee to its day���s high of 45.69 early in the day.

However, the domestic currency soon lost all its early gains as the dollar rallied sharply, mirroring its bull run in global markets. The rupee closed at 45.77 against the dollar, down from its previous close of 45.75.