What changed
For NRE term deposits (1-3 years), the interest rate ceiling was revised from the previous LIBOR/SWAP rates to LIBOR/SWAP plus 50 basis points. For FCNR(B) deposits of all maturities, the ceiling was raised from LIBOR/SWAP minus 75 basis points to minus 25 basis points. Floating rate FCNR(B) deposits now have a ceiling of SWAP rates minus 25 bps with a six-month reset period.
What it means for you
Banks can now offer slightly higher rates on NRE deposits, making them more attractive to NRIs, but must stay within the new cap. The FCNR(B) ceiling increase gives banks more room to compete for foreign currency deposits, potentially boosting inflows. However, margins may compress as funding costs rise. Banks need to update their deposit pricing models and systems immediately.
What you must do
- Update NRE term deposit rate sheets to cap at LIBOR/SWAP plus 50 bps for 1-3 year tenors, effective September 16, 2008.
- Adjust FCNR(B) deposit rates to not exceed LIBOR/SWAP minus 25 bps for all maturities, and ensure floating rate deposits use SWAP minus 25 bps with six-month reset.
- Apply revised rates to all new deposits and renewals of existing NRE/FCNR(B) deposits after their current maturity.
- Communicate changes to branch operations and treasury teams to ensure compliance from close of business September 16, 2008.
Who it affects
All scheduled commercial banks (excluding RRBs) offering NRE and FCNR(B) deposit accounts, NRI depositors and their relationship managers, Bank treasury and ALM teams managing deposit pricing
What is the new interest rate ceiling for NRE term deposits?
For fresh NRE term deposits with 1-3 year maturity, the rate cannot exceed LIBOR/SWAP rates plus 50 basis points for US dollar of corresponding maturities, as on the last working day of the previous month.
How does the FCNR(B) deposit ceiling change?
The ceiling for FCNR(B) deposits of all maturities is raised from LIBOR/SWAP minus 75 bps to minus 25 bps. For floating rate deposits, the ceiling is SWAP rates minus 25 bps with a six-month interest reset period.
Do these changes apply to existing deposits?
No, they apply to fresh deposits contracted from September 16, 2008, and to renewals of existing NRE/FCNR(B) deposits after their current maturity period ends.