(Bloomberg) -- India’s central bank said it will allow banks to raise interest rates on deposits by Indians living aboard, as it seeks to stem a decline in the rupee by attracting foreign exchange.
The move comes as the monetary authority 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.
Keeping the rupee steady has been a key plank of the Reserve Bank of India’s policy, and Governor Shaktikanta Das has said the authority will 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 rose as much as 0.3% to 84.52 per dollar after the decision, before paring gains. The currency hit a record low of 84.7625 on Dec 3.
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, Das said in his monetary policy speech on Friday.
Similarly for deposits of three-to-five year maturity, the ceiling has been raised to overnight ARR plus 500 basis points, up from 350 basis points at present.
“Our approach ensures that forex reserves act as shock absorbers, safeguarding the economy from external spillovers, while supporting competitive and orderly market conditions,” Das said.
More Measures
India’s forex reserves are still quite robust and part of the depletion was due to valuation losses, he said at the post-policy media briefing.
“It is a facilitation we have provided to attract more inflows and an opportunity for non-resident Indians to invest,” he said on the FCNR move. “We will take more measures as and when they are required.”
The central bank’s need to buffer the rupee was a key reason for not lowering rates on Friday, traders said. The monetary authority cut the cash reserve ratio by 50 basis points to 4% to inject liquidity into the banking system.
“An easy monetary policy can only lead to further pressure on the rupee, and the RBI must remain cautious,” said Sandeep Yadav, head of fixed income at DSP Mutual Fund. “Despite what RBI says, rupee risks remain dominant as evidenced by the increase in FCNR rates.”
--With assistance from Bhaskar Dutta.
(Updates with details, analyst comment)
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