New Delhi, August 2: The Reserve Bank of India’s (RBI)’s special window for Foreign Currency Non-Resident (Bank) deposits has officially concluded, with banks now slashing their interest rates by almost half. The FCNR (B) scheme has been an unexpected success, allowing the RBI to raise more than $100 billion to shore up its forex reserves.
The RBI’s strategy on incentivizing long-term dollar commitments through the 35 million-strong Non-Resident Indian (NRI) diaspora earlier had a deadline for the end of September, but the RBI has been forced to advance it as it met the threshold expected. These deposits are backed by sovereign guarantees by th RBI, and allow NRIs to invest in them in a basket of currencies, including the US Dollar, British Pound, Euro, Canadian Dollar, Australian Dollar and Japanese Yen.
With the three-to five-year FCNR (B) deposits having yields as high as 6.5-7%, NRIs rushed to invest in them, with banks adding to the yields.
With the window now closed on September 1, banks have effectively halved their interest rates, with HDFC Bank reducing it to 3.15% from 6.25%, ICICI Bank lowering it to 3.25% from 6.25% and SBI resetting it to 3.05% from 5.75%.
The massive inflows have offered unexpected liquidity to the banking system, pushing the weighted average call rate below the repo rate.
With the RBI absorbing the hedging costs for these deposits, lenders have received an additional source of capital for their lending requirements that is most likely to be deployed locally.
