NRI inflows to decline

Third Quarter Review of Annual Statement on Monetary Policy for 2006-07

Banks see a drop in non-resident deposits as the Reserve Bank of India (RBI) has lowered the interest rate ceilings on such deposits.

The ceiling on interest rates that banks can offer on foreign currency non-resident deposits [FCNR(B)] and non-resident (external) rupee account [NR(E)RA] has been reduced by 25 basis points and 50 basis points, respectively, to manage liquidity concerns arising out of large capital inflows.

In its quarterly monetary policy review, the RBI noted that there was merit in moderating additions to liquidity from large capital inflows and, hence, some changes in administered rates relating to non-resident deposits were considered appropriate.

NR(E)RA deposits, which were earlier earning an interest of 100 basis points over the London inter-bank offer rate, would see a 50 basis points fall and FCNR(B) deposits, which were earning Libor rates, would be priced 25 basis points below Libor.

"We have taken three sets of measures, including monetary, prudential and managing capital account in terms of NRI deposits. The management of capital flows is important, as some of the flows are directed towards areas where we are trying to control growth," said RBI governor Y V Reddy.

According to the RBI, a sizeable increase in NR(E)RA and FCNR(B) deposits has already been observed in 2006-07. From April to October 2006, NRI deposits grew over 5 per cent to Rs 37,003 crore. This comes on the back of a 6.5 per cent growth in non-resident deposits at the end of March 2006 to Rs 35,134 crore from Rs 32,975 a year earlier.

Partha Mukherjee, head, treasury, UTI Bank, said, "The reduction in interest rates will impact, to some extent, flow of money into foreign deposits."

The interest rate ceilings on NR(E)RA and FCNR(B) deposits are reviewed on an ongoing basis based on the prevailing monetary conditions.

With continued acceleration in asset prices, the central bank said asset prices in capital markets as well as real estate were influenced by relative fiscal incentives and external sector policies in addition to overall liquidity conditions.