Our Bureau

Mumbai, March 28

The Reserve Bank of India (RBI) on Tuesday hiked the interest rate ceiling on FCNR (B) deposits by 25 basis points.

The RBI decision assumes significance, as an increase in the interest on FCNR (B) deposits were among the measures sought for improving liquidity, by bankers at their meeting with the RBI Governor earlier in the day. Accordingly, the interest rates on FCNR (B) deposits of all maturities contracted effective close of business in India on March 28, 2006, should not exceed LIBOR/SWAP rate prevailing on the last working day of the previous week, said the RBI press release.

Earlier, the ceiling was 25 basis points below the LIBOR/SWAP effective April 29, 2002.

This means that the interest rate on one-year deposits would be at the LIBOR rate, say 5.2 per cent, as against 4.95 per cent as earlier, said a bank official.

For deposits of more than one year, the interest rates is linked to the SWAP rate.

"FCNR deposits will now become costlier to banks. The spread will come down from 100 to 75," he said.

However, this may not translate into significant foreign currency flows into the country, as the benefit to investors or depositors would only be marginal, the official added.

(This article was published in the Business Line print edition dated March 29, 2006)
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