The Reserve Bank of India is likely to free interest rates on some foreign currency accounts and loans to enable banks to attract more deposits and earn better returns, bankers said on Friday.

The RBI is due to announce its monetary policy for the year to March 2004 on Tuesday and bankers familiar with its deliberations said a freeing up of rates on such accounts was likely.

There was strong demand for foreign currency funds and a shortage of dollars, a senior private sector banker said.

"So the expectation is that the RBI might use the credit policy to free interest rate ceilings both on the liability and asset sides," the banker said.

Banks are now allowed to pay a maximum rate of a quarter percentage point below the LIBOR on Foreign Currency Non-Resident Bank or FCNR(B) accounts.

Bankers said this cap made these deposits less attractive, especially to the large number of expatriate Indians, who find the rupee-denominated Non-Resident External (NRE) deposits more attractive for their higher rates and free convertibility.

Central bank data shows that inflows to FCNR(B) deposits in the 10 months to January 2003 grew by one per cent from the previous year, while those to NRE rupee deposits nearly quadrupled.

A senior RBI official told Reuters the jump in the NRE rupee deposits was largely due to the diversion of investments to the scheme following the closure of a few other rupee-denominated non-resident deposit accounts.

On the lending side, banks have found the ceiling of 75 basis points above LIBOR on loans to exporters under the Pre-shipment Credit in Foreign Currency (PCFC) account restrictive.