NRI deposit rates may be tuned

The Credit Policy for 2003-04 is expected to remove the cap on the interest rates on foreign currency non-resident (bank) deposits and allow commercial banks to determine the rates on their own.

This is to ensure a higher inflow of these deposits and to remove the anomalies existing among various Non-Resident Indian deposits.

Most of the banks have exhausted their foreign currency non-resident (bank) funds and no fresh inflow is seen as NRIs are finding Non-Resident External rupee deposits higher paying.

At present, banks are allowed to peg the foreign currency non-resident (bank) deposit rates at 25 basis points -- one basis point is one hundredth of a percentage point -- less than the swap rate of a comparable maturity.

For instance, the one-year foreign currency non-resident (bank) deposit rate cannot be more than 1.15 per cent because the one-year swap rate is 1.4025 per cent.

The two-year swap rate is 1.925 per cent and the three-year swap rate is 2.475 per cent.

For non-exporters, the foreign currency loan rates can be anywhere between 100 basis points and 250 basis points over Libor. The six-month Libor is now pegged at 1.32 per cent and the one-year Libor at 1.40 per cent.

There has been a mad rush by corporates to avail of the cheap foreign currency non-resident (bank) loans against the backdrop of an appreciating rupee.

Since the rupee has been appreciating since 2002-03, corporates are not taking forward cover to hedge their foreign currency exposure.

Those who are taking cover are also finding the foreign currency non-resident (bank) loans cheap because the forward premiums have crashed.

Typically, a highly rated corporate can raise one-year foreign currency non-resident (bank) funds at 3 per cent (150 basis points over Libor).

After factoring in the cost of one-year forward cover (around 2.75 per cent annually), the effective cost of foreign currency non-resident (bank) funds works out to around 5.75 per cent, much cheaper than rupee funds.

Having lent their foreign currency resources to corporates, banks are left with no funds to lend to exporters, who can get foreign currency loans at 75 basis points over Libor.

Lending to exporters does not make sense for banks because other borrowers are willing to bid and avail of these loans at 200 basis points over Libor, points out Venkatesh S Bijoor, senior partner, Prime Forex Consultants.

Fresh accretion to foreign currency non-resident (bank) deposits is very small because the NRIs are finding NRE rupee deposits more lucrative.

For instance, one-year deposits earn around 6 per cent. Also NRE deposits are repatriable -- they can be reconverted into dollars at the time of redemption of the deposits.

Even if a depositor wants to hedge his position by taking forward cover, he makes more money since the interest rate works out to over 3 per cent (6 per cent minus the one-year forward cover cost of 2.60 per cent).

Bankers feel the Reserve Bank of India may address some of the anomalies existing in the pricing of foreign currency loans to exporters and foreign currency deposits to NRIs in the Credit Policy.