By James Mathew
Some of the private sector banks, however, offer higher interest rates on dollar deposits by NRIs in a bid to shore up their foreign currency accounts
India’s largest commercial bank, State Bank of India (SBI), has slashed interest rates on US dollar denominated deposits - foreign currency non-resident-bank (FCNR-B) deposits – by 11 basis points to 2.47 percent, a move which will further squeeze returns for NRIs (non-resident Indians) on their foreign currency deposits in India.
The 2.47 percent interest rate is for an NRI dollar deposit of a one-to-two year period. If the deposit is withdrawn before completion of one year, no interest will be paid on such deposits.
According to officials at SBI, the bank has reduced interest rates on its term deposits by 25 basis points to 6.25 percent, which will also impact the rupee deposits of NRIs.
Banking sources say many other Indian banks are also expected to slash interest rates on their FCNR-B deposits and also on NRI rupee deposits, taking the cue from the leader, SBI.
The Gulf region accounts for a major part of both NRI bank deposits and remittances to India.
SBI’s move to further reduce interest rates on dollar deposits by NRIs, though in line with the global trend of softening of interest rates on bank deposits, comes at a time when the overall NRI deposits in Indian banks have been on a downward trend since beginning of FY20.
Fresh NRI bank deposits dropped to $4.04 billion during April-August 2019, down by about 30 percent from $5.70bn in the corresponding period of last year, mainly on account of a drop in interest rates and the strengthening of the rupee against the US dollar during this period.
FCNR-B accounts, however, saw an increase in fresh deposits at $725 million during this period, up from $597m total deposits from April to August 2018.
“Although the interest rate advantage that India had over the western market has narrowed with a continuous fall in interest rates since February, the interest rate offered by Indian banks is comparatively still higher. This has led to the increase in dollar deposits by NRIs,” a senior official in a public sector bank said.
Some of the private sector banks, however, offer higher interest rates on dollar deposits by NRIs in their bid to shore up their foreign currency accounts, according to banking sector officials.
Federal Bank, the Kerala-based leading bank, in dealing with NRI deposits and remittances mostly from the Gulf region, currently offers 2.72 percent interest rate on its FCNR-B deposits.
Unlike rupee deposits, FCNR-B accounts by NRIs do not carry foreign exchange risk as the deposits are parked in foreign currencies. For those who put money in this account, gain comes from interest rate differential.