In order to attract more dollars into the country, the Reserve Bank of India on Thursday increased the interest rates on foreign currency deposits of non-resident Indians (FCNR-B) held in Urban Co-operative Banks (UCB). In the first week of May, the central bank had revised interest rates on such deposits held by scheduled commercial banks (SCB).
The ceiling on one to three year foreign currency deposit rates in UCBs has been upped to 200 basis points above the London Interbank Offered Rate (Libor) from 125 basis points earlier. On deposits of three to five years, UCBs can offer rates of up to 300 basis points above Libor instead of only 125 basis points earlier.
The revision in interest rates on FCNR(B) for SCBs, on May 5, 2012, were aimed at augmenting foreign currency inflows to banks which in turn would facilitate foreign currency loans to exporters, the RBI had observed. Deposits of all maturities, contracted effective from the close of business in India as on November 23, 2011, would attract interest upto 125 basis points over Libor. On floating rate deposits with SCBs, the RBI had directed that interest should be paid within the ceiling of Libor plus 125 basis points.
With a view to providing greater flexibility to banks in mobilising non-resident deposits and also in view of the prevailing market conditions, the central bank deregulated the interest rates on non-resident (external) rupee (NRE) deposits and ordinary non-resident (NRO) Accounts in December, 2011. Accordingly, most banks increased the interest rates on NRE deposits, making them almost comparable to rates on domestic deposits. For example, State Bank India has raised rates by as much as 574 basis points (bps) across all maturities on its foreign exchange deposits. SBI increased the interest rates on NRE deposits of less than R1 crore, with a maturity of one to two years, to 9.25 %, as against 3.82 % earlier.
