The Hindu Business Line : FCNR(B) deposit rates move northwards again

FOREIGN Currency Non Resident (Banks) deposit rates have started inching up once again. The hike has been to the tune of about 20-25 basis points across maturities. A basis point is one hundredth of a percentage point.

A one-year deposit denominated in dollars fetches 2.18 per cent from Union Bank of India (UBI). Similarly, a two-year deposit fetches 3 per cent from UBI.

Bankers say that the increase in international benchmark rates (LIBOR or London Inter-bank Offered Rate), which was in the 1-per cent range for a year, has now moved to around 1.8 per cent. Besides, expectations of a rate hike by the US Federal Reserve have been cited by bankers as reasons for the hike in FCNR(B) deposit rates.

UCO Bank, Union Bank of India, State Bank of Travancore, Bank of India, Bank of Rajasthan, Lord Krishna Bank and Canara Bank are among the banks that have hiked rates on FCNR deposits in June.

Mr H.S.U. Kamath, DGM (International Division), Union Bank of India, explained the increase thus: "Rates of FCNR(B) deposits are subject to the RBI guidelines and linked to LIBOR and dollar interest rate swaps. These rates have to be in tandem with market-related quotes. The NRE deposit is an important segment of deposits as these have lower cost than overall fund cost. Banks would like to have these deposits to bring down overall cost and to increase the foreign currency reserves base for lending to exporters."

FCNR, EEFC and NRE deposits are part of the foreign currency resource corpus of banks. This is used by them to provide Indian corporates and exporters (pre-shipment and post-shipment finance) foreign currency loans at LIBOR-related rates.

Mr Ratnakar Hegde, Executive Director, Union Bank of India, had said in a recent interview to this paper that such LIBOR-linked loans cost just around 6 per cent compared to the rates of around 14 per cent that companies may be paying on their rupee credit.

Mr Kamath said banks were now trying to attract foreign currency deposits by revising the rates.

Union Bank of India had an NRI deposit portfolio of Rs 4,100 crore at the end of March 2004. Bank of India had a NRI deposit base of about $800 million or about Rs 3,600 crore.

Bankers said that the rupee has been weakening (down by a little over 1 per cent over the past week) and international interest rates are rising. Oil prices have been rising over the past four or five months to a high of $42 per barrel in early June from the earlier $32 per barrel and even $27 per barrel. Besides, the market expects the Federal Reserve rate to be hiked by a possible 100 basis points over the next year. More banks can be expected to join the bandwagon soon.

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