Mumbai, July 17: The Reserve Bank of India (RBI) today set a cap on the interest rate that banks can offer on non-resident (external) rupee or NRE deposit, a measure that could staunch the torrent of dollars pouring into the country and rein in the runaway rupee.
A large part of the record $ 82.77 billion in forex reserves is believed to have flowed into these deposits, which help non-resident Indians (NRIs) earn more on every dollar converted into rupees and parked in these accounts.
A one-year NRE rupee deposit yields 5 per cent against 1 per cent on a dollar account. Analysts put NRI inflows into rupee deposits at over $ 6 billion in 2002-03. This could fall to $ 4 billion as a result of the RBI edict.
Observers say the return will be zero if a depositor hedges the exchange risk by paying a premium of 2.5 per cent on the one-year dollar. One can gain if money in these accounts is left without cover against forex swings.
Repatriable NRE deposits for one to three years, contracted from today, should not offer a rate more than 2.5 per cent above the London Inter-Bank Offered Rate (Libor), the RBI said. That could mean a yield of 3.75 per cent — Libor is 1.2 to 1.25 per cent — against 5-5.5 per cent now. The changes also apply to deposit renewals.
When banks bring down interest rates on these deposits, it will choke some of the dollars that are heading for India and, in effect, keep the rupee from soaring. The RBI itself did not say as much. It merely put out a release saying the cap was imposed to bring in some consistency in the interest rates on NRI deposits.
“This is the first time that the RBI has admitted that inflows are the result of arbitrage,” an analyst said. Some feel lesser dollars could hit money market liquidity. This is because the RBI pumps rupees into the money market as it buys greenbacks. Today however, the rupee ended at 46.30, down from 46.22 on Wednesday.
State Bank of India (SBI) managing director P Venkatachalam said even after a revision, the interest rate on NRE accounts would be attractive, if the rupee was stable. The maturity of NRE deposits would continue to be one to three years, but the rate ceiling would apply to accounts that are maintained for periods above three years.
Forex controls relaxed
The RBI today further relaxed foreign exchange controls when it raised the limits for employment, emigration, maintainance of close relatives and education abroad. The existing limit of $ 5000 for employment, emigration and maintainance abroad has been raised to $ 100,000 while that for education rises from $ 30,000 to $ 1,00,000.