What changed
The interest rate ceiling on fresh NRE term deposits for one to three years was lowered from LIBOR/SWAP plus 50 basis points to LIBOR/SWAP rates only. This change applies to deposits booked or renewed after close of business on April 24, 2007, and also covers maturities beyond three years using the three-year rate.
What it means for you
RRBs must now cap NRE deposit rates at the benchmark LIBOR/SWAP rate, reducing their cost of funds on these deposits. This could make NRE deposits less attractive to NRIs, potentially slowing inflows and easing liquidity pressures. Banks need to adjust their deposit pricing strategies immediately to comply.
What you must do
- Update NRE term deposit interest rate slabs to ensure rates for 1-3 year maturities do not exceed LIBOR/SWAP rates for corresponding US dollar maturities.
- Apply the new ceiling to all fresh NRE deposits and renewals from April 24, 2007, including deposits with maturities over three years.
- Communicate the rate change to branch staff and NRE depositors to avoid confusion and ensure compliance.
- Acknowledge receipt of this circular to your respective RBI Regional Office.
Who it affects
Regional Rural Banks (RRBs), NRE depositors, Treasury and deposit operations teams at RRBs
Does this rate cap apply to NRE deposits with maturities longer than three years?
Yes, for deposits exceeding three years, the interest rate ceiling is the same as that for three-year deposits, i.e., the LIBOR/SWAP rate for three-year US dollar maturities.
When exactly does this new rate ceiling take effect?
It is effective from the close of business in India on April 24, 2007. Any fresh deposit or renewal on or after that date must comply with the new ceiling.
What was the previous rate ceiling before this change?
Earlier, the ceiling was LIBOR/SWAP rates plus 50 basis points, which had been in place since January 31, 2007.