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Non-resident gamble

18.05.12

On December 16, the Reserve Bank of India (RBI) deregulated interest rates on Non-Resident External (NRE) and Ordinary Non-Resident (NRO) deposits. Within a week's time, a number of banks doubled, if not almost trebled, the rates offered by them. This included not just the usual Kerala and other South-based banks with established NRI clientele: Even an otherwise conservative HDFC Bank raised its rate on NRE deposits from 3.8 to 9 per cent. Such alacrity was quite in contrast to their rather muted reaction to the RBI's earlier much-hyped move to deregulate savings bank deposit rates. Barring three private sector banks, nobody really responded. Banks, till recently, could not offer more than 275 basis points above the global benchmark London Inter-Bank Offered Rate (LIBOR) on NRE term deposits. The RBI would vary this mark-up above LIBOR at regular intervals, depending on whether it wanted to encourage or discourage these deposits. Now, in a clear message that it wants forex inflows to come in at any cost, banks have been given the freedom to set the rates they seek, subject to these not being higher than what they are offering on comparable domestic rupee deposits (currently hovering between 9.25 to 9.60 per cent across various banks).

Source: Hindu Business Line