RBI hikes forex deposit rates to check outflows

The Reserve Bank of India (RBI) today announced an increase in interest rates on foreign currency deposits with banks in India in a bid to check flight of foreign currency in the wake of continued fall in the value of the Indian rupee. 

RBI today raised the interest rate ceiling on Foreign Currency Non-Resident [FCNR (B)] deposits of banks from the existing 125 basis points (bps) above the corresponding LIBOR/Swap rates to 200 bps above LIBOR/Swap rates for maturity period of 1 year to less than 3 years, and to 300 bps above LIBOR/Swap rates for maturity periods of 3 to 5 years.

RBI also raised the ceiling rate on export credit in foreign currency, which was constraining the availability of credit to exporters in foreign currency. The central bank has now allowed banks to freely determine their interest rates on such credit.

The above measures are aimed at augmenting foreign currency inflows to banks, which in turn would facilitate their foreign currency loans to exporters, RBI said in a release.

These measures will come into effect from 5 May 2012. RBI said it would issue detailed guidelines separately.

The domestic unit has fallen by 85 paise or about 9 per cent against the US dollar in three consecutive sessions amidst a heavy sell-off on the stock markets by foreign institutional investors.

The country witnessed net portfolio outflows of around $540 million over the last two months against net inflows of $13 billion in January-February.

The rupee is down 2.3 per cent for the week, closing at 53.47/48 to the dollar amidst concerns over the country's widening current account and fiscal deficits as well as new tax proposals.

Currency traders, however, do not expect the move to help stem further near-term weakness of the rupee.