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Home / Industry / Banking /  RBI’s taper tantrum tactic fails to draw NRI investments

RBI’s taper tantrum tactic fails to draw NRI investments

The flow of money into NRI deposits moderated sharply to $422 million during April-May this year from $2.43 billion in the same period a year ago. Photo: Mint

Rise  in  yields worldwide blunts  move  to  hike NRI  deposit  rates 

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MUMBAI :The Reserve Bank of India’s decision to allow banks to raise deposits from non-resident Indians (NRI) by offering them higher rates, taking a page from its 2013 taper tantrum playbook to defend the rupee, has not resulted in a significant jump in forex inflows in the first two weeks of its implementation.

The Reserve Bank of India’s decision to allow banks to raise deposits from non-resident Indians (NRI) by offering them higher rates, taking a page from its 2013 taper tantrum playbook to defend the rupee, has not resulted in a significant jump in forex inflows in the first two weeks of its implementation.

Bankers, on condition of anonymity, said there is little incentive for depositors to invest in these products or for banks to promote them.

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Bankers, on condition of anonymity, said there is little incentive for depositors to invest in these products or for banks to promote them.

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“Ultra HNIs (high net worth individuals) who have invested in certain bonds are bleeding. As a result, they are unwilling to put extra money into deposits, which are earning just 25 basis points more than before," said the treasury head of a large bank.

NRIs have found it less attractive to invest in Indian deposits of late because of the rise in yields globally and currency risks in investing in the country.

To make Indian deposits more attractive, the Reserve Bank on 6 July exempted banks from maintaining cash reserve ratio or statutory liquidity ratio on incremental foreign currency and rupee-denominated deposits and lifted the cap on interest rates on these deposits.

The higher forex inflows through NRI deposits would help stem the rupee’s slide against the dollar, the RBI reasoned.

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The changes reduced the blended cost of funds for banks by 20-30 basis points, resulting in a similar rise in interest rates on NRI deposits.

Following the relaxation, many top banks, including State Bank of India (SBI), ICICI Bank and HDFC Bank, hiked interest rates on foreign currency non-resident (FCNR) deposits.

SBI, India’s largest bank, revised its foreign currency non-resident deposit (FCNR) rates in the range of 2.85-3.25% per annum on various tenures of dollar deposits from 10 July. ICICI Bank raised FCNR deposit rates by 0.15% on deposits higher than or equal to $350,000 for 12-24 months tenure to 3.50%.

Banks, too, have little interest in promoting these foreign currency deposits as the cost of one-year rupee term deposits is around 6% as against FCNR(B) deposits, which could cost 7-7.5% after considering hedging expenses.

“We see the usual flows ahead of Onam. But we are not seeing any significant increase post hiking rates on NRI deposits. It doesn’t have the sweetener it had in 2013," said a banker with a Kerala-based bank.

Experts said that the dollar inflows into India would not be as significant compared to the taper tantrum in 2013 when the rupee breached the 68 per dollar mark and forex reserves depleted to $274.8 billion, as the incentives for both depositors and banks are far less attractive.

The Reserve Bank had then offered banks a subsidized fixed swap rate window on three-year FCNR deposits, cushioning the currency risk.

The scheme garnered $34 billion.

The swap window allowed banks to buy forward contracts to hedge their dollar exposure for all fresh three-year foreign currency deposits raised from non-residents at a much lower price than what was prevailing in the market.

According to the latest RBI data, the flow of money into NRI deposits moderated sharply to $422 million during April-May this year from $2.43 billion in the year-earlier period.

Outstanding NRI deposits declined to $137 billion in May from $144.3 billion in May last year. Foreign currency deposits decreased to $15.91 billion in March from $19.87 billion in the year-ago period.

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