Foreign currency deposit rate cap hiked

Faced with a depreciating rupee due to dwindling dollar inflows, the Reserve Bank of India (RBI) on Friday announced measures to attract more dollars into the country.

Banks can now offer higher interest rates on foreign currency deposits of non-resident Indians. The RBI raised the ceiling on 1-3-year foreign currency deposit rates to 200 basis points above the London Interbank Offered Rate (LIBOR) from 125 basis points earlier. On deposits of 3-5 years, banks can offer rates of up to 300 basis points above Libor, instead of 125 basis points earlier. Further, in a separate notification, the RBI deregulated interest rates on foreign currency loans to exporters and said that banks can now decide interest rates by themselves. Till now, interest rates on such loans were capped at 350 basis points above the Libor.

?The above measures are aimed at augmenting foreign currency inflows to banks which in turn would facilitate their foreign currency loans to exporters. These measures will come into effect from May 5,? the RBI said in a release today. Market participants said that the measures are positive but may not bring in dollars immediately.

?Its a positive as far as sentiment goes, but it is not a direct source of dollars into the country. It increases the pool of available dollar funds for the country,? said Ananthnarayan G, Regional Head, Fixed Income, Currencies & Commodities, South Asia at Standard Chartered Bank.

Meanwhile,the rupee came precariously close to 54 levels on Friday, but recouped day’s most of the losses to end at 53.47/48, down six paise against the US currency, after RBI’s suspected intervention in forex market. The domestic unit opened sharply lower at 53.65/66 and further plunged to 53.92 amid sluggish equities and fears of more capital outflows after reports that government is reviewing taxation treaty tax-haven Mauritius.