In a bid to limit the huge inflow of foreign exchange, the Reserve Bank of India (RBI) on Monday said that the interest rate offered on non-resident (external) (NRE) rupee deposits will now be capped at 100 basis points (BPS) over the London inter-bank offered rate (Libor). This is a sharp 150 BPS (basis points) reduction from the earlier ceiling of 250 BPS over Libor announced on July 17, this year. It’s pertinent to note that the RBI directive comes in the fortnight ahead of the redemption of the $5.5 billion Resurgent India Bonds (RIB). It remains to be seen how this affects the rollover of the maturing RIBs. Incidentally, this is also the first official move on the forex front by new RBI governor, Y.V. Reddy. The cut also follows the warning by the International Monetary Fund (IMF) that a massive build-up in foreign exchange reserves in Asian emerging economies has gone too far especially given the gaping imbalance in global current accounts. Why RBI slashed rate • Forex inflows continue at same level • NRIs taking arbitrage profits • IMF warns against forex build-up • Rates abroad have fallen • RBI has to invest this money abroad The RBI stated: ‘‘It has been decided, until further notice, the interest rates on fresh repatriable NRE deposits for one to three years contracted effected close of business on September 15, should not exceed 100 BPS (instead of 250 BPS) above the Libor/swap rate for US dollars of corresponding maturity’’. According to bankers, a huge amount of money has come to India to take advantage of higher interest rates in India. ‘‘Interest rates in the US and Europe have fallen steeply.. the inflow is because of this factor,’’ they said, adding, ‘‘the RBI has to earn higher returns from this dollar inflow to give the promised interest rate. RBI normally invests this dollar reserves in government securities of other countries. But the scope for getting higher returns has come down.’’ The RBI further pointed out the maturity period of NRE deposits would continue to be one and three years, and the interest rate as determined above for three year deposits would also be applicable in the case the maturity exceeds three years.
