Yes Bank Ltd. and AU Small Finance Bank are offering a rate of 7.1% on five-year deposits to non-residents, while HDFC Bank Ltd. and Central Bank of India provide up to 6% on similar tenures. This move follows the Reserve Bank of India's recent measures to allow lenders more flexibility in offering competitive rates on overseas deposits, aiming to attract foreign capital and bolster the weakening rupee.
The Reserve Bank of India (RBI) unveiled these measures last week as part of a broader strategy to attract foreign capital and strengthen the rupee, which has been hitting record lows due to high oil prices affecting the nation's balance of payments. By allowing banks to offer more attractive rates on overseas deposits, the RBI aims to contain funding costs and provide relief to lenders facing stiff competition for deposits.
Larger banks with established non-resident Indian (NRI) deposit bases face less pressure to raise rates aggressively, whereas smaller banks are compelled to offer higher yield premiums to attract new NRI customers. This differentiation in strategy highlights the varying pressures faced by banks in the current economic climate.
“Larger, well-established banks already benefit from a sizable NRI deposit base, and therefore, face less pressure to raise rates aggressively.”
Madhavi Arora, Economist at Emkay Global Financial Services
The initiative is part of a broader shift in India's currency-defense strategy, focusing on attracting fresh dollar inflows through incentives for banks, overseas borrowings, and foreign-currency deposits, rather than relying solely on foreign-exchange interventions or interest-rate hikes.
This strategy revisits a playbook from the 2013 taper tantrum, when the RBI introduced swap windows for similar deposits and banks' overseas borrowings, ultimately attracting $34 billion and stabilizing India's external position during a turbulent period for emerging markets.
Background
The current measures are expected to help stabilize the rupee and improve India's external financial position. However, the effectiveness of these measures in attracting substantial foreign capital inflows remains to be seen, and market participants will be closely monitoring the impact on the currency and deposit rates.
The current measures are expected to help stabilize the rupee and improve India's external financial position. However, the effectiveness of these measures in attracting substantial foreign capital inflows remains to be seen, and market participants will be closely monitoring the impact on the currency and deposit rates.
