The Hindu Business Line : Interest rate cap on NRE deposits cut

THE Reserve Bank of India on Saturday capped the interest rates on non-resident external (NRE) deposit schemes to LIBOR/SWAP rates with effect from close of business in India on April 17.

Earlier, NRE deposit schemes attracted a rate of 25 basis points above LIBOR/SWAP.

Forex reserves surged by a colossal $3.370 billion for the week ended April 9, a historic high in terms of reserves accretion in the span of a week. In fact, the inflows have been so tremendous that the domestic currency has appreciated by over Rs 1.34 between mid-March and mid-April alone.

RBI's sterilisation of dollar liquidity from the market to curb the rupee's sharp appreciation is one of the main reasons for the massive jump in the reserves, according to market watchers.

Analysts contend that the apex bank must have supportive evidence that a sizable amount of this accumulation in reserves is NRI money.

According to some estimates doing the rounds in the market, almost one-third of the latest surge in reserves is on account of NRI remittances.

As per RBI's latest diktat, the new cap on NRE rates would be applicable to deposits of up to and exceeding a maturity period of three years. The changes in interest rates will also be applicable to NRE deposits renewed after their present maturity period.

"With a view to aligning the interest rates on various categories of NRE deposits, it has been decided to link the interest rate on NRE savings deposits also to LIBOR/SWAP rates with effect from close of business in India on April 17, 2004," said an RBI press release issued here on Saturday.

The interest rates on NRE savings deposits should not exceed the LIBOR/SWAP rates for six-month maturity on the US dollar deposits. The interest rate on NRE savings deposits may be fixed quarterly on the basis of the LIBOR/SWAP rate of the US dollar on the last working day of the preceding quarter. For the quarter April-June 2004, the US dollar LIBOR/SWAP rate as on the last working day of March 2004 would be applicable, the apex bank has said.

At present, interest rates on NRE savings deposits is linked to domestic savings deposit rate whereas the interest rates on NRE term deposits are linked to LIBOR/SWAP rates for US dollar since July 17, 2003.

On advances against NRE savings deposits, RBI has clarified that since account holders can withdraw savings deposits at any time, banks should not mark any type of lien, direct or indirect, against these deposits.

Interest rates on NRE deposits were linked to LIBOR/SWAP rates for US dollar from July 17, 2003. The interest rates on these deposits were reduced from 250 basis points above LIBOR/SWAP rates of corresponding maturity on July 17, 2003 to 100 basis points above LIBOR/SWAP rates of corresponding maturity on September 15, 2003, and later to 25 basis points above LIBOR/SWAP rates of corresponding maturity on October 18, 2003.

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