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Implications of cut in NRE deposit rates

By Our Special Correspondent

CHENNAI, SEPT. 16. The Reserve Bank of India's decision to further cap the interest rate on NRE deposits has a number of implications for the depositors and the banks alike. Hitherto banks can offer no more than 100 basis points above the benchmark LIBOR rates, sharply lower than the existing ceiling (250 basis points over LIBOR). The obvious implication that the central bank flushed with surging reserves of over $87 billion is not too concerned over the possible negative signals this move will surely send out to the depositors. Banks in Kerala, for whom NRE deposits are one of the mainstays, are busy modifying their strategies, which aimed to garner deposits by taking advantage of the interest rate differentials.

According to K. P. Padmakumar, Chairman, Federal Bank, Aluwa, one of the big players in the NRE segment, the new RBI directive means that the deposit rates that Indian banks can offer will not match what some banks in the Middle East are already offering on their dollar deposit schemes. It is also likely that some of the money might flow into real estate instead. In a place like Kochi it makes sense for a non-resident to go in for an apartment rather than a bank deposit. The rental income can be even better than the interest offered by banks. Besides, there is capital appreciation.

The RBI move will obviously affect the ongoing efforts of SBI and other banks at mobilising the $5.4 billion RIB money. The Resurgent India Bonds are coming up for redemption over the next fortnight.

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