RBI frees non-resident deposit rates to prop up rupee

Continuing its efforts to shore up Indian rupee after its record freefall against the US dollar, the Reserve Bank of India has deregulated non-resident external (NRE) rupee deposits and ordinary non-resident (NRO) accounts, hoping to garner more dollars.

In a circular issued late on Friday late evening, RBI said banks are free to determine interest rates on both savings deposits and term deposits on such accounts.

While NRE deposits can be repatriated in dollars, NRO money cannot. It is held in rupees in India.

So far, there was a ceiling on how much banks can pay on such deposits - London Inter-bank Bid Offer Rate plus 100 bps. Though this cap is gone now, RBI said banks could pay only interest rates comparable to local deposit rates.

It specified that the revised rates would apply only to fresh deposits and on renewal of maturing deposits. Further, banks should closely monitor their external liability arising on account of such deregulation and ensure asset-liability compatibility from systemic risk point of view.

"With a view to providing greater flexibility to banks in mobilising non-resident deposits and also in view of the prevailing market conditions, it has been decided to deregulate interest rates (such accounts)," the RBI said in its circular.