Mumbai: The Reserve Bank of India (RBI) on Friday deregulated interest rates on non-resident (external) rupee, or NRE, and ordinary non-resident, or NRO, accounts in a move to increase dollar flows into the country and support the rupee.
Individual banks are now free to fix interest rates on these savings and term deposits of one year maturity and above, but the rate cannot be higher than local term deposit rates, RBI said in a notification late on Friday.
“With a view to providing greater flexibility to banks in mobilizing non-resident deposits and also in view of the prevailing market conditions, it has been decided to deregulate interest rates on non-resident (external) rupee deposits and ordinary non-resident accounts,” RBI said.
NRO accounts are domestic accounts of people working abroad. The rates offered here are the same as any domestic deposit. For example, when an Indian goes abroad, his existing account turns into an NRO account. The money kept in India attracts local domestic rates, but the description of the account changes.
When money comes from abroad, it’s routed through NRE accounts. So far, the rates have been regulated and benchmarked to the London interbank offer rate (Libor).
Last month, RBI lifted the cap on them to Libor plus 275 basis points (bps) from Libor plus 175 to make the deposits more attractive. A basis point is one-hundredth of a percentage point.
R.K. Bakshi, executive director at Bank of Baroda, said competition between banks will increase following the RBI move. “The rates will slowly go up to as high as domestic rates,” Bakshi said.
J. Moses Harding, head of the asset liability committee and economic and market research at IndusInd Bank Ltd, said the attractive returns on deposits in India are likely to attract more non-resident Indians (NRIs) to park their money here.
“NRI money now will flow in a big way to India, if not immediately but gradually addressing the liquidity and dollar shortage problem,” Harding said.
RBI’s latest move is another attempt to support the rupee, which has fallen 15.18% since August. On Friday, the currency rebounded from an all-time low to close at 52.74 per dollar, down from Thursday’s close of 53.64 per dollar.
Inflow from NRIs have been rising steadily. RBI numbers show NRI deposits were at $51.68 billion (around Rs2.73 trillion) at the end of March 2011, up from $47.89 billion a year ago. Provisional RBI figures show this is expected to be at $51.97 billion at the end of October 2011.
“The revised deposit rates will apply only to fresh deposits and on renewal of maturing deposits. At any point of time, individual banks should offer uniform rates at all their branches,” RBI said in the notification.