Some banks raised interest rate on non resident Indian (NRI) deposits in order to attract more dollar into the country.
Earlier, Reserve Bank of India (RBI) allowed lenders to offer higher interest rates on NRI accounts to attract dollar and thereby reduce weakness in rupee exchange rate.
Following this, Federal Bank raised its non-resident external (NRE) term deposit rates in the three-year and above bucket to 9 percent. This is higher than the 8.75 percent offered on identical domestic deposits.
In the first quarter of 2013-14, the bank saw a 50 percent growth in its NRE deposits when compared to the same period last year.
Compared to issuing NRI bonds, raising interest rates on long-term deposits in NRE accounts is a cheaper option to raise resources from abroad. This is because issuing NRI bonds entails additional costs like having roadshows overseas.
RBI also allowed banks to offer 100 basis points higher rates on foreign currency non-resident (B) deposits by increasing the ceiling to 400 basis points over Libor from 300 basis points earlier.