Interest rate in India will go up further making fixed deposits, especially Rupee premium accounts in Indian banks more attractive investment option for Non Resident Indians (NRIs).

P Pradeep Kumar, Managing Director, State Bank of Travancore, said banks expect the Reserve Bank of  India, India’s central bank, to implement another round of interest rate hike to rein in double digit inflation in the country.

“In India, interest will increase further because the latest increase in oil prices will push up inflation level further. The Reserve Bank of India’s body language for the last couple of months indicates that the interest rate charged by Indian banks will go up further by 25 basis points. It will definitely affect the lending rates and the interest out-go on home loans, automobile loans and other loans,” he said, adding that it will also increase the yield on fixed deposits by NRIs in new Rupee Premium accounts.

High interest rate will also hit many NRIs who have taken housing loans or other personal loans from various Indian banks.

“After we introduced the State Bank of Travancore Premium Rupee accounts, many banks have followed and implemented the same type of rupee accounts offering better rates. If the interest rate in India goes up, NRIs will get better interest yield on Premium Rupee Account. Even though the Indian currency had been appreciating, the remittance by NRIs have not come down,” he said.

“Last one week, the rupee has started weakening and remittance level has started picking up again,” he said.

Pradeep said NRI deposits in the last fiscal has grown from Rs10,298 crores ($2.3 billion) to Rs10,914 crores. During the current year, the bank has witnessed a sharp increase in the total amount of NRI deposits, from a negative growth in 2009-10.

SBT Premium Rupee Account is a special NRI Deposit product, which offers better return on NRE Rupee funds by way of interest as well as benefits of forward premium in the foreign exchange market. NRE Rupee funds are converted as FCNR deposit in foreign currency which has the highest forward premium in the market.

A forward contract is booked for the maturity amount and on the maturity date the maturity amount will be converted to NRE Rupee account at predetermined conversion rates. The main gain for the NRI depositor is that he can retain all the benefits of NRE accounts, but can fetch better interest rate, more than NRO deposits. With the domestic interest rate likely to go up further, depositors can expect a bonanza.

Even though the exchange rate of the Indian currency is not favourable, they can get better yield.

SBT, which has a representative office in Dubai, manages two exchange houses and has tie-ups with 28 money remittance companies in the region.

As part of expanding its presence in the Middle East, SBT will increase the number of customer service officers. As more Indian banks are coming to the Gulf to tap the NRI business, SBT will depute 9 new relationship officers to various GCC countries, the Managing Director said.

While the bank will not increase its retail branch network in the UAE, the operations of City Exchange, a money remittance subsidiary of State Bank of Travancore will open more outlets in the UAE, Oman and the region, he said.

The bank recorded reasonable growth in all key parameters, 20 per cent growth in operational profit at Rs1,176 crore (ending March 2011) as against Rs972 crore in the previous year, driving by a healthy growth of 21.14 per cent in net interest income at Rs1,696 crore against Rs1,400 crore last year.  The bank will give a dividend of Rs18 per share (face value Rs10), a move that will benefit many NRIs who have shareholding in the bank.