NRI alert: Expect higher interest rates on long term NRE deposits

Non-resident Indians (NRIs) are set to get higher interest rates on their tax-free non-residence external (NRE) fixed deposits with maturities of three years and above.

The Reserve Bank of India (RBI) on Wednesday deregulated the interest rate offered by banks to NRI. Banks, till now, were not been allowed to pay higher interest rates for NRE deposits than those for resident ones.

“"... It has been decided to give banks the freedom to offer interest rates on such (FCNR, NRE) deposits without any ceiling. The extant ceiling on non-resident ordinary accounts shall continue," RBI said in a notification.

“The instructions will be valid up to November 30, 2013, subject to review," it added.

A few national and cooperative banks continue to offer 9.50 per cent on NRE deposits of 365 to 730 days; rates for long-term deposits (three years to seven years) were ranging between 8 and 8.5 per cent, as banks don’t want to lock their liabilities at higher interest rates. However, things seem to have changed following the RBI announcement.

Karnataka Bank, a Mangalore-based private sector bank, has raised its NRE interest rates across various maturities effective from August 16. For deposits above 3 years to 5 years, the rate now stands at nine per cent.

In the UAE, banks offer between 1.5 per cent and four per cent on fixed deposits.

This website reported on August 12 that Union Bank of India (UBI) was luring NRI depositors, assuring doubling of their deposits in 91 months with annual interest rate of 9.25 per cent and an annualized yield of 13.37 per cent.

Though banks are rolling out schemes to attract NRI deposits, on the contrary the Rupee slide since May has not resulted in increase of NRI inflows.

RBI data reveals that the flow of money into NRI deposits in April-June 2013 was $5.5 billion down from $6.5 billion in first quarter 2012.

Indian Rupee had hit an all-time low of 60.72 against the dollar in June. Since January this year, the rupee has weakened 8.39 per cent and has lost the most among Asian currencies after the yen during the period to June.

Bankers have expressed surprise and are unable to pinpoint reasons for the trend, say Business Standard newspaper.

“The fall has been sudden for many NRIs to take quick call to make more deposits with banks in India. Perhaps, they may have kept decision on hold (to send money) in hope of further slide,” a top executive with Mumbai-based public sector bank told the newspaper.

In July, however, Sudesh Giriyan, vice-president, Xpress Money Service, run by UAE Exchange, said their monthly turnover, which was about $600 million, had sharply increased after the rapid fall in the rupee value.

Depreciating Rupee does benefit NRIs in terms of getting good exchange rates, however, the Indian economy actually suffers, making imports costlier and stoking inflation.

According to World Bank, remittances to the South Asia region are estimated to have increased sharply in 2012, growing 12.3 per cent to $109 billion.

India remains the largest recipient in the world, receiving $70 billion in remittances in 2012.

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