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Rate differential with global deposits puts lid on FCNR flows to Indian banks

Shyam Mani, head – SME & NRI of CSB Bank, said that interest rates overseas have gone up after the Fed hikes. “So it is easier for people to keep the money there in comparison to what we can offer here. The clients are getting better interest rates overseas,” he said.

Rate differential with global deposits puts lid on FCNR flows to Indian banks
This year, the window, which is open till October 31, is expected to bring in only a fraction of that amount, bankers said.

A steep climb in the global deposit rates may be keeping a lid on the flow of foreign currency deposits from non-resident Indians (NRIs) into India, according to bankers.

The Reserve Bank of India’s (RBI) move to liberalise interest rates on foreign currency non-resident (FCNR) deposits in July this year has so far yielded a tepid response, as compared to 2013, when a similar move had resulted in flows worth around $35-36 billion over three months. This year, the window, which is open till October 31, is expected to bring in only a fraction of that amount, bankers said.

Ashutosh Khajuria, executive director of Federal Bank, said, “The response to the NRI deposit garnering exercise has been less enthusiastic than in 2013 because the deposit rates in the system are today much lower than they were then. Also, the secured overnight financing rate (SOFR) today is above 2%, while the Libor in 2013 was around 0.5%.”

Interest rates in the advanced economies have been on the rise as their central banks have embarked on a series of monetary tightening measures, including aggressive rate hikes, in a bid to tame inflation. The US Federal Reserve, European Central Bank and Bank of England have all hiked benchmark rates in 2022 and hinted at more rate increases in the months ahead. This has resulted in a sharp increase in deposit rates overseas in a matter of months.

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Simultaneously, Indian banks are not in a position to sweeten their rates too much despite the regulatory relaxation, as domestic deposit rates remain relatively low due to the presence of excess liquidity in the system. One banker pointed out that rates on domestic term deposits maturing in one to three years ranged from 9.5-10% in 2013, but they are closer to 6% now.

Shyam Mani, head – SME & NRI of CSB Bank, said that interest rates overseas have gone up after the Fed hikes. “So it is easier for people to keep the money there in comparison to what we can offer here. The clients are getting better interest rates overseas,” he said.

Mani explained that when the rates were Libor-linked, the interest rate at which deposits were taken globally stood at 0.75% or 1%. The same rate has now shot up to 4.35%, which is higher than the FCNR rate Indian banks can offer at present. “We’re offering FCNR at 3.95%, as against 1.2% earlier, but they’ve gone from 0.75% to 4.35% and they don’t have this hassle of conversion,” Mani added.

Banks have also been relatively less aggressive this year, even as they launched limited-period offers in late August to lure NRI clients. In 2013, some banks designed products popularly known as leveraged deposits, where they first raised dollar money via bonds and then lent it to NRIs for opening deposits. The deposit was held as security for the loan.

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