The Hindu Business Line : Banks told to make NRE rupee deposits unattractive

THE Reserve Bank of India is understood to have `informally' asked the public sector banks to cut interest rates on non-resident external (NRE) rupee deposits, to make it unattractive for NRI customers.

According to sources, RBI has expressed concern over the high interest rates on such accounts. They said there had been large-scale inflow of funds as interest rates overseas were low.

According to banking circles, RBI is also worried over the impact of heavy dollar inflow on the rupee. "The rupee has been strengthening substantially over the past few months. This has been primarily due to heavy dollar inflows, a large part of which is constituted by NRI remittances. The apex bank has indicated that it would help if rupee deposits can be made unattractive," said a banker.

A fortnight ago the country's largest public sector bank, State Bank of India (SBI) chopped interest rates on NRE deposits by around 150 basis points across maturities. Sources close to the bank said that there might be room for further reductions in the near future. Bank of India followed suit last week by reducing interest rates on NRE deposits by 75 to 100 basis points.

In fact, it is particularly interesting that rates on domestic term deposits are now higher by around 100 basis points as compared to NRE deposits in both the banks.

The rationale behind offering higher interest rates on domestic deposits and lowering rates on NRE deposits, even though ultimately both are rupee funds, is with the view to discouraging NRIs from the latter, sources said.

Other public sector banks too are said to be brainstorming with their asset liability committees and mulling further reductions.

Over the past few months there has been a surge in non-resident external (rupee) accounts, particularly in public sector banks. A crash in global interest rates led many NRIs to shift their funds from dollar accounts to higher interest-bearing rupee accounts.

Rupee deposits were a better option for NRIs as until recently, a one-year Non-Resident External (NRE) deposit (in rupees) attracted a rate of anywhere between 6.75 per cent and 7.50 per cent whereas a one year dollar deposit (FCNR) rate is capped at Libor minus 25 basis points. One-year Libor currently rules at 1.40 per cent.

Public sector banks are already flush with domestic rupee deposits.

They do not have to mobilise any more and have trouble deploying their existing resources.

"Even if they discourage a small segment of NRIs by offering lower rates it will not impact their business in anyway," said a banker.

Meanwhile, private sector banks continue to offer high rates on NRE deposits in many cases with rates on par with their domestic term deposits. "We cannot afford to turn away our customers. We may review our rates to see if there is scope for marginal reduction, but will not do anything that will discourage our NRI customers as we need the business," said a senior official with a leading private sector bank.

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