Raise interest rate on NRFC accounts instead of borrowing

Friday, 20 September 2013 02:48 - - {{hitsCtrl.values.hits}}

Economist and stockbroker, R.M.B. Senanayake is urging the Government to raise interest rate on NRFC deposits instead of borrowing via expensive bonds abroad. Commenting on the National Savings Bank recent borrowing of $ 750 million from the international market at 8.75%, Senanayake claimed the savings giant did not need to borrow in foreign currency but it was acting as a proxy for the Government, which is reluctant to go for a Sovereign Bond this year to roll-over the foreign debt falling due for repayment. “The cost of funds to NSB (which the Government will have to reimburse) is 8.75% plus the cost of a foreign exchange swap to cover the exchange risk is exposed to. The premium on foreign exchange swaps is 9%. So the cost of the foreign borrowing for the NSB is 17.75%,” Senanayake pointed out. He lamented that commercial banks pay a measly 2-3% interest on the NRFC and RFC accounts with them. These are largely held by Sri Lankans who have less incentive to repatriate their foreign currency deposits. “Is it due to the lack of competition among our banks which are in a price fixing mode or is it the Central Bank that the banks are paying such a low rate of interest on these deposits?” queried Senanayake. “If the interest rate on these foreign currency deposits is raised to at least 8.75%, won’t there be much larger foreign inflows? The interest rates limits for deposits meant for non-resident Indians were liberalised recently by the Reserve Bank of India,” Senanayake added.

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