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The freeing up of interest rates on NRI (Non-Resident Indian) deposits by the Reserve Bank of India will attract more foreign currency, which in turn will strengthen the rupee, said bankers.
The RBI, on Friday, deregulated the interest rates on Non-Resident (External) rupee (NRE) deposits and Ordinary Non-Resident (NRO) Accounts.
The rates on these deposits should now be comparable those offered on domestic rupee deposits, said the RBI.
As per RBI guidelines, banks can now determine their interest rates on both savings deposits and term deposits of one year and above maturity under NRE accounts and savings deposits under NRO accounts.
A step further
In November, the RBI had increased the interest rates on NRE term deposits by 100 basis points and on FCNR (B) deposits by 25 basis points, thereby allowing banks to offer higher interest rates.
Now the central bank has gone up a step further and de-regulated the interest rates altogether.
As on October-end, the total NRE, NRO, FCNR deposits were at $51.975 billion, according to RBI data.
According to Mr N. S. Venkatesh, Chief General Manager and head treasury, IDBI Bank, this move is welcome. It will bring in more foreign currency due to which the rupee will strengthen and imported inflation will come down.
“As long as interest rates in India are higher than those in foreign countries, NRI deposits will be attractive. When huge amounts of money flow in, it is possible that the arbitrage could reduce. But until then we are likely to see good inflows,” Mr Venkatesh said.
Currently, the interest rates on NRE deposits work out to less than 4 per cent. Post the deregulation, the interest rate would be higher, even after deducting the swap cost or the cost of converting the foreign currency into rupee.
More money could flow into NRE deposits as the money is fully repatriable and there is no tax.
So the effective return could work out to be fairly substantial, said an official from a public sector bank.
Attractive currently
How much interest banks will offer will depend on individual bank's requirement for funds and the scope for deployment. But for NRIs it is definitely an attractive investment at this point of time.
“Even if someone borrows money overseas at LIBOR plus 100 basis points, pays a swap cost and covers it fully, the deposit will still fetch them a higher return,” explained the official.
According to Mr Sumeet Vaid, CEO, Ffreedon Financial Planners, this is a right time for NRIs to invest in bank deposits as interest rates have peaked and the dollar-rupee exchange rate is in favour of the dollar.
“It can't get better for NRIs in terms of the dollar's value and interest rates, as the RBI's own view says that interest rates have peaked,” he said.
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