Thursday 12 January 2012

Would the RBI's move to deregulate interest rates on NRE/NRO deposits in RRBs really benefit the investors?

RBI has issued a notification on 19th December 2011 saying that the RRBs (Regional Rural Banks) can fix the interest rates for NRE/NRO term deposits exceeding one year. Would it really benefit the investors? I don't think so. My reasons are, (1) These interest rates of 7 to 8% which the banks like ICICI, HDFC, etc.. are offering are only for Rupee accounts and not on FCNR (Foreign Currency Non Resident) accounts, which are still at 3 to 4%. This would mean that with a falling Rupee rate, there is no real benefit for term deposits lasting a year. It appears that RBI has tacitly conceded that the Rupee rate will fall further by atleast 4 to 5% in the next 12 months. Thus, for those who want to invest in Rupee accounts for a year and want to repatriate the funds back to their country of origin, they would be no appreciation in the value of investment. (2) If the investors choose to use the funds in Indian markets or spend in India, the high rate of inflation which is hovering around 9% would mean that the money in a year's time would have approximately the same value as the day it was invested. Unless the conditions within the Indian Economy change for the better, which would strengthen the Rupee I don't think investing in the Rupee accounts for higher interest rates makes real sense at all.

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