NRE term, FCNR deposit rate hikes: ‘Too little, too late'

The Reserve Bank of India may have acted too little and too late with respect to the revision in NRE term (100 bps) and FCNR (B) (25 bps) deposits rates.

This is the general impression that one gets from the largely mixed response to the RBI move from the banking sector in Kerala.

The hike was announced late last evening as part of the bid to shore up the country’s weakening exchange rate defence against the continuing attack on the rupee.

According to sources in the banking sector that includes State Bank of Travancore, the largest player in the remittances sector, the prevailing interest rates start at 2.69 per cent or thereabouts for NRE remittances.

Even if this increase is to get reflected in the rates, this would not match the 4 per cent now being offered on NRE savings bank deposits.

The rate-sensitive NRE customers would have a hard look at the rate differential before committing on any incremental investment decision. So, bankers are not exactly enamoured by the RBI move.

Inflows had peaked when the rupee had crossed the psychological Rs 47 to a dollar barrier, but the rate of flow has not seen any dramatic swing on the upside, according to sources.

The Rs 47 to a dollar level was the best rate, as has been seen from the way in which the flow of remittances has behaved since August.

Since then, the rupee has been on a roller-coaster ride, weakening no less than 18 per cent. But flows have not been as dramatic, to say the least, banking sources said.

The Asset-Liability Management Committee (Alco) would have to take a call on revising the base rate, if at all, as a follow-up to the hike in NRE and FCNR (B) interest rates, a source in State Bank of Travancore said.

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