NRE Fixed Deposits Can Earn Higher than Domestic; FCNR Deposit Rates Ceiling Hiked

14 August 2013

Deposits in Non Resident External (NRE) Fixed Deposit in Scheduled Commercial Banks can now earn higher than deposits in domestic deposits, with RBI deregulating interest rates on NRE deposits.

Deregulation of interest rate of NRE fixed deposits with maturity 3 years and above is a temporary move valid till November 2013, unless it is extended. Prior to this interest rate of NRE deposits had the cap of domestic deposit rates which meant they could only be at par or lower than domestic deposit rates. Now banks are free to fix any rates for NRE deposit with term exceeding 3 years.

With Rupee-Dollar exchange falling to new lows every day RBI is taking steps to limit the fall. Higher interest rate in NRE account can attract fresh deposits from abroad and push up the supply of dollars.

Similarly the ceiling on deposit rates of Foreign Currency Non-Resident (FCNR) has been raised by 100 basis points, ie by 1 %.

Current falling rupee scenario we are witnessing is due to short supply of dollars in the market majorly since dollars are being globally withdrawn to their home country by institutional investors as US economic prospects show definite signs of improvement vis-à-vis emerging economies like ours (at least at the moment) and since India's crude oil import (which is paid in dollars) is increasing.

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