Several Indian banks increased interest rates on foreign-currency deposits for non-resident Indians on Wednesday after a regulatory tweak by the central bank last week. Some lenders raised rates by as much as 300 basis points on three- to five-year tenors, a direct response to the policy shift.
The Reserve Bank of India announced on Friday that it will bear the full hedging cost for non-resident deposits with three- to five-year maturities. The measure is being presented by authorities as a tool to encourage inflows from overseas depositors and to help counter recent weakness in the rupee.
The rupee has depreciated by 6% so far this year, making it the second-worst-performing currency in Asia. The currency also dropped to record lows in May, underscoring the broader exchange-rate pressure cited by policymakers.
Individual banks moved quickly to adjust their pricing. HDFC Bank raised rates by 235 to 265 basis points, bringing yields to 6% on three- to five-year foreign-currency deposits. State Bank of India increased rates by up to 300 basis points across three- to five-year terms. For deposits up to $1 million with tenors of three to five years, the bank now quotes rates between 5.25% and 5.75%. For deposits above $1 million on the same tenors, quoted rates range from 5.5% to 6%.
AU Small Finance Bank also widened its foreign-currency deposit yields, raising rates by 195 basis points and offering 7.1% on three-year deposits and 7% on five-year deposits.
Context and immediate effects
The central bank's decision to absorb hedging costs for three- to five-year non-resident deposits is aimed at making those longer-dated foreign-currency deposits more attractive. Banks' rate hikes reflect a rapid market response to that change, with different institutions setting distinct rate bands depending on deposit size and tenor.
Market participants are watching whether the higher quoted yields and the hedging support will translate into increased overseas inflows and whether that, in turn, eases pressure on the rupee.