India’s central bank says it will increase interest rates on deposits by Indians living aboard, as it seeks to stabilise the Rupee by attracting foreign exchange.
The move comes as the Reserve Bank of India (RBI) has been using its foreign exchange reserves to slow the pace of the drop in the rupee, which has hit a series of new lows in recent weeks amid rising global headwinds.
Governor Shaktikanta Das of the reserve bank of India’s policy has made it a point of duty to curb currency volatility to insulate the economy from global spillover risks. The central bank’s reserves have fallen from a record $705 billion in end-September to $657 billion following its interventions in the currency market.
“This is clearly a tacit attempt to tap other sources of foreign capital flows, which could give the RBI some breathing room and lower its need for FX intervention,” said Madhavi Arora, lead economist at Emkay Global Financial Services.
Non-resident deposits recorded a net inflow of $10.2 billion in April-September, almost double from the year-ago period, according to the RBI. The rupee gained as much as 0.3 per cent to 84.52 per dollar after the decision. The currency hit a record low of 84.7625 on Dec 3.
Das said in his monetary policy speech on Friday that Banks can now offer rates up to the Overnight Alternative Reference Rate (ARR) — a benchmark rate — plus 400 basis points for Foreign Currency Non-Resident (Bank) deposits with maturities between one and less than three years.
Similarly for deposits of three-to-five year maturity, the maximum has been raised to overnight ARR plus 500 basis points, up from 350 basis points at present.
Das hopes that forex reserves act as shock absorbers, safeguarding the economy from external spillovers, while supporting competitive and orderly market conditions.
