Mumbai, Oct. 18: The Reserve Bank of India’s (RBI) tirade against arbitrage-driven dollar inflows is continuing. The central bank today brought down the ceiling on interest rate on fresh repatriable non-resident (external) rupee (NRE) deposits to 0.25 per cent above London Inter-Bank Offered Rate (Libor) from the current level of one per cent.
This is the third revision in the ceiling on NRE deposit interest rates since mid-July. It was in mid-September that the central bank ruled that interest rates on fresh repatriable NRE deposits for one to three years should not exceed 100 basis points.
Since July this year, the RBI has ruled that interest rates on repatriable NRE deposits should be linked to Libor/swap rates for the dollar in a bid to provide consistency in the interest rates offered to NRIs.
“On a review, it has been decided that, until further notice, the interest rates on fresh repatriable NRE deposits for one to three years contracted effective close of business in India on October 18 should not exceed 25 basis points (as against 250 basis points announced on July 17, 2003 and 100 basis points on September 15, 2003) above the Libor/swap rates for US dollar of corresponding maturity,” RBI said in a statement issued today.
The central bank added that the maturity period of repatriable NRE deposits would continue to be one to three years and the interest rate as determined above for three-year deposits would also be applicable in case the maturity period exceeds three years.
The changes in interest rates, it added, will also apply to repatriable NRE deposits renewed after their present maturity period.
The RBI move, market circles said, has been taken to rein in arbitrage. They added that though the central bank had on two occasions enforced measures in this regard, its efforts had not yielded result as inflows from expatriates continue to pour in as interest rates here are attractive. This has been one of the reasons responsible for the country’s forex reserves attaining new highs.
“While the RBI has been trying to control such flows, money is continuing to pour in. I don’t see, why this time around, the inflows should stop,” a treasury chief from a leading private sector bank told The Telegraph when asked whether the RBI move would lead to decline in such inflows.
While banks will now have to alter interest rates offered on NRE deposits, sources said the next move of the central bank may bring NRE rates on a par with Libor rates.