Indian lenders sharply increased interest rates on foreign currency non-resident bank deposits denominated in US dollars in the 3-5 year tenor, raising the prospect that depositors could prematurely break existing deposits and rebook the proceeds as fresh, higher-yielding placements.
WHAT HAPPENED
Reports from the market indicated that banks adjusted pricing on FCNR(B) USD deposits recently, lifting rates on the medium-term buckets. ICICI Bank and Axis Bank raised FCNR(B) rates by up to 310 and 305 basis points respectively, while HDFC Bank and SBI announced peak rates of 6%, Business Standard reported.
FCNR(B) deposits are a liability instrument for banks that allows non-resident Indians and other eligible non-residents to hold deposits in foreign currency. The tenor that saw the most notable repricing was the 3-5 year band. The repricing followed the Reserve Bank of India's move in early June to open a special swap window for fresh FCNR(B) deposits of three to five years, under which it effectively absorbs the entire hedging cost on those deposits.
MARKET AND BANK IMPLICATIONS
The RBI's incentive applies only to fresh deposits and those renewed on maturity, so existing FCNR(B) deposits continue to earn their lower contracted rates.
The situation was not unique to a single institution: several large banks, including SBI and ICICI Bank, raised FCNR(B) rates after the RBI's move.
Sources: The Hindu Business Line Banking
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