The Reserve Bank of India will bear the full hedging cost for three-year to five-year foreign currency non resident (FCNR) deposits, it said on Friday, as part of a broader set of measures to encourage dollar flows and stem the depreciation pressure on the rupee.
The scheme – a redux of a similar window opened in 2013 – will allow banks to offer overseas customers a more lucrative rate of interest to draw dollar deposits.
The rate that banks will offer will be higher than the U.S. treasury rate and definitely will attract investors, PNB CEO Ashok Chandra said in an interview with Reuters on Monday, declining to specify what rate the bank will offer.
Three-year U.S. treasuries yield 4.203% while five-year notes offer 4.273%. Currently, non-resident deposits earn 3.5% but with the RBI bearing the hedging cost, banks will be able to offer a higher rate to customers.
“It is a win-win situation for non-resident Indians and for the banks,” Chandra said.PNB, the country’s eighth largest bank by market capitalisation, aims to raise about $2.5 billion to $3 billion through its own bank, he added.
It plans to market these deposits aggressively in key Indian diaspora markets such as the United States, Canada, United Kingdom and the Middle East, pitching returns that exceed U.S. Treasury yields, Chandra said.
Other mid-sized state-run lenders such as Indian Bank, Canara Bank and Central Bank of India pegged likely inflows at between $20 billion and $25 billion, while private sector lender Federal Bank expected possible flows of $30 billion.
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“Unlike 2013 where the interest differential between U.S. and India was in the range of 5-6%, compared to 1-2% presently, the relative attractiveness is lower,” said Harsh Dugar, executive director, Federal Bank.
The RBI had last launched the scheme in 2013 when the Indian Rupee had depreciated sharply due to the U.S. Federal Reserve’s “taper tantrum”.
Details on the scheme, in particular, whether banks will be allowed to offer customers leverage to park such deposits is awaited and could be key to its success, brokerage house Jefferies said in a note on Monday.
“We will watch out for RBI’s stance on client leverage as this may be key determinant of extent of mobilisation under this scheme,” Jefferies analysts said.