Drooping Libor Compels Cut In Fcnr Rates

With the benchmark London inter bank offered rate (Libor) declining from 5.284 per cent in January to 2.74 per cent in September, Indian commercial banks are being forced to slash the interest rates on the foreign currency non-resident-B (FCNR-B) and the non-resident non-repatriable (NRNR) rupee deposits in order to protect their spreads.

Bank of Baroda (BoB) cut its FCNR(B) rates twice over the last one week. First, on September 17, it revised the rates on FCNR (B) deposits of various maturities and followed that up with another revision on September 21.

Bank of India also has slashed interest rates on the NRNR deposits by 50 basis points on deposits up to Rs 15 lakh and by 25 to 50 basis points on deposits of Rs 15 lakh and above.

In BoB, FCNR (B) deposits, in the one to two year bracket, now carry an interest rate of 2.75 per cent (on dollar deposits), 4.25 per cent (on pound sterling deposits), 0.05 per cent (on yen deposits) and 3.25 per cent (on euro deposits).

For the deposits in the two to less than three years bracket the interest rates are: 3.25 per cent (dollar deposits), 4.50 per cent (pound sterling deposits), 0.075 per cent (yen deposits) and 3.50 per cent (euro deposits).

And for deposits of three years the rates are: 3.50 per cent (dollar deposits), 4.75 per cent (pound sterling deposits), 0.10 per cent (yen deposits) and 3.75 per cent (euro deposits).

Over the last couple of months, the banks have slashed the interest rates on these two categories of deposits in sync with the fall in the Libor -- the interest rate that banks charge each other for short-term eurodollar loans ranging from a overnight to five years.

Since the beginning of the calendar year, the Libor has fallen by around 250 basis points.

Though the Indian banks are able to mobilise good non-resident Indian deposits due to falling rupee and the higher interest rates, the absorptive capacity (deploying the funds, so raised, profitably) has come down drastically leading to a squeeze on the spreads, which typically ranges between 25 and 100 basis points.