RBI's Dollar Deposit Push Gains Pace; Indian Banks Offer Up to 7.1% to NRIs

Indian lenders are offering significantly higher returns on foreign-currency deposits in a bid to attract non-resident Indians, marking the first major test of the RBI's latest measures aimed at boosting capital inflows.

Yes Bank and AU Small Finance Bank are offering up to 7.1% on five-year foreign-currency deposits. State Bank of India, HDFC Bank and Central Bank of India are offering rates of up to 6% on similar tenures for NRIs.

At 7.1%, some Indian banks are offering a premium over comparable dollar-denominated assets in developed markets. Five-year US Treasury notes currently yield about 4.3%.

The rates, which are subject to change, follow measures announced by the RBI last week that give banks greater flexibility to offer attractive returns on overseas deposits while managing funding costs.

Why Are Banks Raising Rates on Foreign-Currency Deposits?

The move is part of a broader effort to attract foreign capital and support the rupee.

The Indian currency has slipped to a series of record lows despite multiple attempts to stabilise it. Higher crude oil prices have added pressure to the country's balance of payments, prompting policymakers to seek additional sources of foreign currency.

Rather than relying mainly on foreign-exchange intervention or interest-rate increases, authorities are trying to bring in fresh dollar inflows through overseas deposits, external borrowings and other banking channels.

According to a Reuters report, lenders could mobilise between $35 billion and $40 billion through foreign-currency deposits by September.

The RBI has also indicated that it is open to banks providing guarantees to offshore lenders. Under the proposal, NRIs could borrow overseas and place those funds as deposits with Indian banks.

Other lenders are expected to announce revised deposit rates this week.

Why Are Smaller Banks Offering Higher Returns?

The latest rate announcements show a clear divide between large and small lenders.

Larger banks already have a substantial NRI deposit base and are under less pressure to raise rates sharply.

Smaller lenders face a different challenge. Many are still trying to build their NRI customer base, which often requires offering higher returns to attract deposits.

The RBI's latest measures also come at a time when banks are competing harder for deposits. A growing share of household savings has been moving into mutual funds and other investment products, leaving lenders with a tougher task when it comes to attracting fresh funds.

How Does This Compare With Earlier RBI Measures?

The current approach revives a playbook used during the 2013 taper tantrum, when the rupee came under sharp pressure after signals that the US Federal Reserve would scale back monetary stimulus.

At the time, the RBI introduced a concessional foreign-exchange swap facility for NRI deposits and banks' overseas borrowings.

The programme ultimately attracted about $34 billion and helped stabilise India's external position during one of the most turbulent periods for emerging markets.

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Among lenders, HDFC Bank mobilised $3.4 billion under the 2013 scheme. ICICI Bank, SBI and several foreign banks also participated.

The latest measures revisit a strategy that previously helped attract substantial foreign currency inflows during a period of market stress.

Sources:

The Economic Times

Moneycontrol

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