Banks hike interest rates on NRE deposits
Vidrum / 29 Dec 2011
Recently, many banks have increased their NRE deposit rates to attract more NRI funds. With this regulation, banks are now free to determine interest rates for both savings deposits and term deposits of maturity of one year and above with immediate effect.
Recently, many banks have increased their NRE deposit rates to attract more NRI funds. The move came in after the RBI deregulated savings account interest rates on Non-External (NRE) deposits and on Ordinary Non-Resident (NRO) accounts on Dec 16, 2011. (The interest rate on term deposits for NRO accounts has already been deregulated). With this regulation, banks are now free to determine interest rates for both savings deposits and term deposits of maturity of one year and above with immediate effect. The revised deposit rates will apply to fresh deposits and on renewal of maturing deposits.
The RBI has taken previously many steps against currency fluctuations, undertaken open market operations and raised the cost ceiling of ECBs to help the rupee appreciate. According to media reports, the central bank may soon close this window as and when it feels that the rupee has stabilised or is in a comfort zone.
This move is definitely good for NRIs, who can now invest in India at better rates. They would now earn interest of approximately 9%-9.50%, up from the rate of around 3.50%-4% that they used to get earlier. This is evident from SBI’s NRE deposit rates as indicated in the following table.
The RBI has taken previously many steps against currency fluctuations, undertaken open market operations and raised the cost ceiling of ECBs to help the rupee appreciate. According to media reports, the central bank may soon close this window as and when it feels that the rupee has stabilised or is in a comfort zone.
This move is definitely good for NRIs, who can now invest in India at better rates. They would now earn interest of approximately 9%-9.50%, up from the rate of around 3.50%-4% that they used to get earlier. This is evident from SBI’s NRE deposit rates as indicated in the following table.
| NRE FIXED DEPOSITS | ||
| NRE Term Deposits-Retail Deposits (Below Rs 1 Cr.) | ||
| Tenures | Existing Interest Rates | Interest Rates w.e.f. 01.01.2012 |
| 1 yr to < 2 yrs | 3.82% p.a. | 9.25% p.a. |
| 2 yrs to < 3yrs | 3.51% p.a. | |
| 3 yrs to 5 yrs | 3.64% p.a. | |
| 5 yrs to 10 yrs | NA | |
| NRE Term Deposits-Bulk Deposits (Rs 1 Cr & above) | ||
| Tenures | Existing Interest Rates | Interest Rates w.e.f. 01.01.2012 |
| 1 yr to < 2 yrs | 3.82% p.a. | 9.00% p.a. |
| 2 yrs to < 3yrs | 3.51% p.a. | |
| 3 yrs to 5 yrs | 3.64% p.a. | |
| 5 yrs to 10 yrs | NA | 8.75% p.a. |
| Source:SBI | ||
Others like Punjab National Bank, Kotak Mahindra Bank, Dena Bank, HDFC Bank, IndusInd Bank etc. have also increased their deposit rates on similar lines as those of SBI.
Further appreciation of the rupee will also give NRIs extra benefit. Take for example, an NRI who invests USD 1000 in deposits for a period of 1 year. This amount will be converted into Rs 52000 (1000*52), assuming the exchange rate of USD 1 = Rs 52. After a year, the individual will get the interest along with the principal amount. This money in rupee terms will again be converted into USD. Let's say that at the time of maturity, the exchange rate is USD 1 = Rs 50. The individual would benefit, as on account of currency fluctuation, s/he would now get USD 1040 in principal (assumed on principal of USD 1000), which is USD 40 extra. Of course, this could also work the other way, where in case of rupee depreciation, the individual may get lesser USDs (principal) then what was invested.
We believe that move will not impact the banking players much, except for those banks that have the majority of their deposits coming in from NRIs. The table below shows the total NRI deposits and the total deposits of Scheduled Commercial Banks. We can see that for FY11, NRI deposits comprised approximately 4% of the total deposits. Thus, the impact on the banks' profitability will not be too high. Nevertheless, the banking space needs to be watched carefully. Despite the beaten down valuations, we suggest that investors wait for the results of Q3 FY12 that will be commencing from the 2nd week of Jan 2012, which will provide cues going ahead.
| NRI Deposits outstanding (Rs / Cr) | ||||||
| Year | NR(E)RA | FCNR(B) | NRO | Total NRI Deposits | Total Deposits of SCBs | NRI Deposits As A % Of Total Deposits |
| 2007 | 106786 | 65955 | 7047 | 179788 | 2644407 | 6.80 |
| 2008 | 106824 | 56651 | 11148 | 174623 | 3282365 | 5.32 |
| 2009 | 119181 | 66803 | 24134 | 210118 | 4063201 | 5.17 |
| 2010 | 124473 | 67607 | 34998 | 227078 | 4746919 | 4.78 |
| 2011 | 117802 | 69658 | 43352 | 230812 | 5616436 | 4.11 |
| Total | 575066 | 326674 | 120679 | 1022419 | 20353328 | 5.02 |
| NR(E)RA: Non-Resident (External) Rupee Accounts | ||||||
| FCNR(B): Foreign Currency Non-Resident (Banks) | ||||||
| NRO: Non-Resident Ordinary Rupee Accounts | ||||||
| Source: RBI & IBA | ||||||
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