Banks Reduced FCNR Interest : The golden era of earning high interest by investing in dollars in India is now over. Major banks in the country, including State Bank of India (SBI), HDFC Bank and ICICI Bank, have sharply reduced interest rates on foreign currency non-resident (FCNR) deposits. This reduction has been made up to 310 basis points. Banks took this important step as the special swap window opened by the Reserve Bank of India (RBI) closed. The foreign fund raising spree that has been going on for the past 10 weeks has now calmed down.
Accounting for the sharp fall in interest rates
Banks have withdrawn the additional interest rates offered on long-term (three to five years) foreign currency deposits. The new rates came into effect from September 1. HDFC Bank has cut its five-year US dollar FCNR(B) rate to 3.15% from 6.25%.
This represents a significant decline of 310 basis points. One basis point is one hundredth of a percent. ICICI Bank also followed a similar pattern by cutting its five-year dollar deposit rate to 2.90% from 6.00%, also a decline of 310 basis points.
Changed equation of SBI customers
The situation is similar in SBI, the country’s largest public sector bank. The bank’s regular 5-year FCNR(B) rate is now 3.05%. Earlier, deposits of up to $1 million fetched 5.75% return under the “Advantage Scheme”. This rate has now been reduced by 270 basis points. SBI, on the other hand, offered 6% interest on deposits above $1 million. This rate has now been reduced by 295 basis points.
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The main reason is the Reserve Bank’s decision
This entire change is due to a single move by the RBI. The central bank launched the dollar-rupee swap facility on June 8. This reduced the cost of raising foreign currency for banks. Banks used this to attract NRI customers with higher returns. The scheme received such a strong response that by August 21, Indian banks had raised $65.4 billion in foreign funds.
Taking into account the total foreign exchange inflows, including foreign borrowing, this figure reached 73 billion dollars. Due to additional inflows, the RBI extended the September 30 deadline to August 31. As soon as the window closed, the banks stopped paying the premium.
Short-term rates remained almost constant
CareAge Ratings Senior Director Sanjay Aggarwal said, the scheme gives banks a new option for foreign currency funding. This significantly improved their liquidity. However, now that this facility has been discontinued, the additional benefits on long-term dollar deposits will gradually decline. Interestingly, while banks have significantly reduced long-term rates, short-term rates have remained virtually stable. This clearly shows that, without RBI’s support, banks are unwilling to offer large premiums on long-term dollar deposits.