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Rate leash on NRE deposits tightened

Mumbai, Sept. 15: The Reserve Bank of India (RBI) today said banks can pay up to 100 basis points over Libor on new NRE deposits, not 250 basis points that had been fixed as the ceiling less than two months back.

The RBI circular capping the yield on the deposits for one to three years could bring down rates on NRI schemes that State Bank of India (SBI) plans to unveil this month to retain some of the Resurgent India Bond (RIB) funds.

The largest commercial bank last week announced the launch of two NRI schemes. The yield on one of those is tied to the rate on the bank’s NRE deposits and the cost of forward cover on the day the receipt is issued.

There is, therefore, a chance that a cut could dissuade RIB holders from rolling over their money into new plans. However, the decision will depend on the gap between the rates offered here and those abroad. On its part, a central bank grappling with the impact of the $ 1 billion that came in last week would prefer the staunch the torrent of dollars from RIB re-investments.

Sources said the RBI was forced to tighten the ceiling after the July leash failed to rein in NRI inflows.

This has pushed up the value of the rupee over the past few months and led to the country’s forex reserves swelling to a staggering $ 87 billion. Analysts say today’s curbs could drive the currency down on Tuesday.

The RBI said the maturity period of repatriable NRE deposits would continue to be one to three years, but those kept longer are also covered by the order.

Most banks brought down interest rates on NRE deposits to 3.75 per cent from 5-5.5 per cent after July’s revision. However, the Libor has moved up marginally, resulting in banks hiking interest rates on both NRE and FCNR deposits.

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