It has been a month since the Reserve Bank of India (RBI) increased the ceiling on interest rates that Indian banks could offer to Foreign Currency Non-Resident (B) deposit holders. Bankers said the channel is yet to see satisfactory flows.
On May 4, RBI announced that banks could offer an interest rate of 200bps above swap rates for FCNR (B) deposits of one to three years tenure and swaps plus 300bps for deposits maturing in three to five years. These rates were increased from the earlier spread of 125bps across maturities.
This was a long-standing demand from banks that witnessed a flight of deposits from FCNR (B) accounts to the Non-Resident External Rupee (NRE) accounts that were deregulated in December 2011. Banks were allowed to offer rates on par with domestic deposits.
| NRI DEPOSIT FLOWS in $ million | |||
| ‘09-10 | ‘10-11 | ‘11-12 | |
| FCNR (B) | 1,047 | 1,339 | -431 |
| NR(E) RA | -71 | -280 | 7,462 |
| Source: RBI | |||
“The substitution of deposits from NRE to FCNR (B) has reduced as of now but it doesn’t stop fully because flows towards the former tend to pick up whenever the rupee stabilises,” said Ajay Marwaha, executive vice-president and head of trading at HDFC Bank. He added for Indian banks that may fall short of dollar funds, FCNR (B) deposits was an important source.
The expectation of the rupee further depreciating has also kept deposits waiting. According to a survey by ING Vysya Bank, the rupee is expected to weaken further against the dollar and is likely to breach the 58-level in the near term. The survey was conducted taking the views of 440 respondents across 220 organisations and the majority expects the rupee to breach 58 per dollar. The crossing 60 was also not ruled out by 15 per cent of the respondents.
Bankers said NRE flows were more perennial in nature, while people invest in FCNR (B) to take advantage of the rise in interest rates or to hold the safe haven currency in a risk-aversion scenario. According to RBI data, there were outflows worth $431 million from FCNR (B) accounts in the last financial year, while there were inflows of $7.4 billion in NRE accounts in the same period.
Presently, higher interest rates on NRE deposits and high volatility in the rupee have helped sustain flows to NRE accounts. For instance, the country’s largest lender, State Bank of India (SBI), currently pays 8.75-9 per cent on NRE deposits, while the interest rates on FCNR (B) deposits in dollars are in the range of 3.07-4.04 per cent, depending upon maturity.
NRI’s are also taking advantage of the falling exchange rate The rupee has depreciated by five per cent against the dollar since the start of this calendar year and by 14.5 per cent in the last financial year. On Monday, it closed at 55.66 against the dollar.
“It would have been better if the central bank took the step earlier in the year. Now, even if the rates are increased further, the incremental flows may not be significant,” said a senior treasury official from a large public sector bank.
The success of the FCNR(B) rate rise is crucial for RBI and the government, which is contemplating whether to launch sovereign deposit schemes for Indians staying abroad, similar to the hugely successful India Millennium Deposits (IMD) launched by SBI in 2000.
RBI is using its foreign exchange reserves to arrest the fall in the domestic currency. Between September 2011 and March 2012, the central bank sold $20 billion in the spot market to arrest the fall.
