Saturday, November 26, 2011

NRI Deposits to earn higher interest rates

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RBI has allowed banks to offer higher return on dollar and rupee deposits made by NRIs. Depreciation in rupee against dollar and other major currencies has led to this decision. Increase in interest rates on NRI deposits will tempt NRIs to invest in India and thereby either bring dollars to India or buy Indian Rupees for investment. The rupee has been touching new lows for last few days and analysts expect it to depreciate even further - some saying that it may even go to Rs 55 against dollar in few months.

Banks can now give 125 basis points over London Inter-bank Offered Rate (LIBOR)- the benchmark rate in international money markets on foreign currency non-resident accounts. Prior to this, banks were allowed to offer only 100 basis points over LIBOR. On non-resident (external) or rupee deposits, the interest rate ceiling has been raised to 275 basis points over LIBOR. Prior to this, banks were allowed to offer only 175 basis points over LIBOR. The six-month Libor is at 0.71%.

In addition to this, RBI has also lifted the $100 million cap on banks for swap. In swap transactions, companies enter into deals with banks to swap rupee loans to dollar and banks sell dollar in spot market and buy in forward. But the market did not feel that this will help to increase dollar supply.

The global stock markets are in a turmoil because of US economic growth and Europe's debt worries. Indian stock markets are also falling down because of that as foreign investors are withdrawing funds.
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