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Indian FCNR deposits less attractive as US yields rise

Mumbai: Several banks have increased interest rates on their foreign currency non-resident (FCNR) deposits after the RBI waived reserve requirements and lifted interest caps earlier this month. However, attracting depositors would be a challenge as overseas investors have an even more attractive option as US treasuries’ yield is higher than some of these deposits’ returns.
Following a spike in US inflation to 9.1%, yields on short-term government bonds of one and two years jumped to 3.2% and 3.22%, respectively. Two-year US treasuries are now yielding higher returns than 30-year bonds, which offer 3.12%, reflecting an inversion in the yield curve — seen as a pointer to a recession.
The country’s largest bank, SBI offers between 2.85% and 3% on dollar deposits of one-year and two-year, respectively. It offers a slightly higher 3.35% on five-year deposits. HDFC Bank offers between 3.35% on one- to two-year dollar deposits and 2% on five-year deposits. ICICI Bank offers 3.35% on one to two-year deposits of above $350000.
In the past, whenever special schemes were used to attract dollar deposits from non-residents, their interest rate differential was very high. This gave non-residents an arbitrage opportunity to move funds to India. Also, banks were given swap options with the RBI, which reduced their forex risks.
SBI, ICICI Bank, HDFC Bank and IDFC First had raised interest rates on non-resident deposits after the RBI measures.



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