Indian Overseas Bank will take a formal decision on increasing interest rates on its FCNR(B) and NRE deposits early next week.
Though a decision on that will be formally taken by the bank's asset-liability committee, it is quite clear that the bank will raise the rates on both the types of deposits.
These are deposits in which foreign residents can keep their moneys in foreign currency.
In FCNR(B), the deposited amount is kept denominated in the foreign currency and the depositor assumes no exchange rate risk.
In NRE, the deposit is converted into rupees — the depositor takes the exchange rate risk. The Reserve Bank of India has imposed a ceiling on the interest rate payable on the FCNR(B) deposits, but the NRE rates are deregulated On Friday, the RBI raised the ceiling on FCNR (B) deposits from 125 basis points above the Libor, to 200 basis points for maturity period of 1 year to less than 3 years, and to 300 bps for maturity period of 3-5 years.
This move is aimed at making it attractive for people abroad to park their money with Indian banks, so that more foreign exchange flows into India.
At a press conference here, the IOB Chairman and Managing Director, Mr M. Narendra, said that the bank would certainly hike rates on these foreign currency deposits.
IOB is a typical case. There is no reason why any bank would not raise the interest rates on these deposits as they are a source of cheap funds.
Even after hedging the exchange rate risk, which is usually by taking a forward cover, the cost of these deposits works out cheaper, said Mr T.S. Srinivasan, General Manager, IOB.
IOB has about $ 260 m in its FCNR(B) account and another Rs 1,400 crore in NRE account.
The decision facing the bank (as for all banks) is how much to hike the rates under each of these two accounts.