by Moiz Mannan
The going just got better for non-resident Indians (NRIs) with one more round of liberalisation of fixed deposit schemes meant for them.
Following up on measures announced by the country’s Finance Minister earlier this week, the apex bank, Reserve Bank of India (RBI), has given banks the freedom to offer interest rates on Foreign Currency Non-Resident Bank [FCNR (B)] and Non-Resident (External) Rupee (NRE) deposits without any ceiling.
The move is born out of desperation to pump capital into the yawning current account deficit that has caused the Indian rupee to tumble by a good 12 per cent or so against the US dollar since May this year.
Announcing the new measures, Finance Minister P Chidambaram said he expected them to bring in a total of $11bn this fiscal, which he estimated would up the capital inflows for the year to $75bn. He said steps would help contain the deficit at $70bn for the year, or an estimated 3.7 percent of gross domestic product, well below the record 4.8 percent a year earlier.
Since the beginning of June, FIIs (Foreign Institutional Investors) have together pulled out over $11bn from the Indian debt and equity markets. Foreign exchange reserves have stagnated at just over $277bn, as capital flows have been just enough to cover the current account deficit. It is estimated that these reserves now cover less than six months of imports.
Among the other measures announced by Chidambaram are controlling oil and gold imports, and allowing sovereign wealth funds (SWFs) to invest in tax-free bonds floated by state-run infrastructure finance companies. The government has earmarked 30 percent of these bonds specifically for investment by SWFs. The government aims to reduce imports of non-essential items such as fridges and TVs. Indian Railway Finance Corp. Ltd (IRFC), Power Finance Corp (PFC) and India Infrastructure Finance Company Ltd (IIFCL) will raise $4bn from overseas via quasi-sovereign bonds to finance long term infrastructure. IRFC will raise $1bn. PFC and IIFCL will raise $1.5bn each, the
It was as a part of these measures that the RBI issued a notification on Wednesday deregulating interest rates on NRI fixed deposit schemes and exempting such term deposits from CRR (cash reserve ratio) and SLR (statutory liquidity ratio) requirements. The extant ceiling on NRO accounts, however, shall continue.
Cash Reserve Ratio (CRR) is the portion of total deposits of banks to be kept with RBI while Statutory Liquidity Ratio (SLR) is the portion of total deposit invested in government securities. Both CRR and SLR are instruments in the hands of RBI to regulate money supply in the hands of banks that they can pump into the economy. Currently, CRR requirement is four percent and SLR is at 23 percent. Banks are required to include all FCNR (B) and NRE deposit liabilities for maintenance of CRR and SLR.
The instructions will be valid up to November 30, 2013, subject to review; the RBI has said in its notification. The move will help in providing more foreign currency cash for banking operation.
Simultaneously, the apex bank raised the ceiling on interest on longer-term deposits of NRIs by 100 basis points. For FCNR-B accounts with maturities of 3-5 years, RBI raised the interest rate ceiling to Libor/Swap plus 400 basis points from Libor/ Swap plus 300 basis points. The reserve bank also removed the ceiling on interest rates on NRE deposits with maturities of three years and above. Since interest rates offered by banks on NRE deposits cannot be higher than those offered by them on comparable domestic rupee deposits, RBI decided to give banks the freedom to offer interest rates on all incremental NRE deposits without any ceiling.
Further, advances extended in India against the incremental FCNR (B) / NRE deposits qualifying for exemption from CRR/SLR requirements as above will also be excluded from Adjusted Net Bank Credit for computation of priority sector lending targets, RBI said.
Banks in India were already offering interest rates on NRE deposits that were several times higher than comparable term deposits of banks in the GCC countries. Further, the continuous fall in the exchange value of the rupee had given NRIs the chance to buy more and more rupees with each dollar or dollar-pegged local currencies.
Public as well as private sector banks are now offering term deposit interest rates between 8.50 and 9.50 per annum. Cumulative yields promised have exceeded 13 per cent. Public sector Union Bank of India and Bank of Baroda have introduced money doubling schemes such as ‘Saat Ka Jadoo’ (seven years seven months) and ‘Double Dhamaka’ (seven years 11 months). The NRE deposits yields are tax-free and fully repatriable (principal and interest).
NRIs investing in the Deutsche Bank Fixed Deposit scheme can earn a cumulative yield of 9.16 per cent (simple interest rate of 8.50 per cent) on a 2 year deposit and 11.21 per cent (simple interest rate of 9 per cent) on a 5-year deposit. Cumulative yield is calculated till the end of the tenure.
Banks had started increasing interest rates a day after RBI announced its first quarter monetary policy review, with HDFC Bank and Axis Bank raising deposit rates on shorter maturities and YES Bank increasing both lending and deposit rates.