Central Bank has Reduced the Ceiling on NRI Deposits

Non-resident Indians (NRI) will now have to settle for lower returns from their deposits in India। The central bank has reduced the ceiling on NRI deposits - FCNR (B) and NRE - by 50 basis points, making these deposits less attractive for investors. The downward revision in the cap on interest rates comes in the wake of large capital flows into the country.

At present, the interest rate ceiling on FCNR (B) deposits is fixed at London Inter Bank Offered Rate (Libor) minus 25 basis points for all maturities। Now, this will be Libor minus 75 basis points.

For NRE deposits, where the depositor takes the exchange rate risk due to the conversion of the funds into rupees, the interest rate ceiling has been brought down to Libor। Earlier, the ceiling was not to exceed 50 basis points above Libor.

"These measures should result in smaller net inflows and help stabilise the rupee in the medium term,'' said Romesh Sobti, country executive, India ABN Amro Bank।

RBI's decision is expected to reduce the scope for interest rate arbitrage and check the rise in money supply। The central bank had lowered the ceiling as late as in January 31, 2007, on FCNR (B) by 25 bps and NRE by 50 bps.

The inflow of NRI deposits showed a quantum jump between April and December 2006 over same period in 2005. They (flow) registered an increase of $3.2 billion in April-December 2006 over that of $1.1 billion in April-December 2005. The outstanding NRI deposits rose from $ 35.13 billion as on March 31 2006 to $ 39.31 billion at the end of January 2007, according to RBI data.