Mutual funds are making an aggressive pitch to mop up non-resident Indian funds even as the Reserve Bank of India has once again cut the interest rates on repatriable non-resident (external) rupee deposits.

NRIs are also investing in savings account, which offer 3.5 per cent interest rate, much higher than the NRE deposit rates.

The RBI on September 18 said the interest rates on fresh repatriable NRE deposits for one to three years should not exceed 25 basis points above the London inter-bank offered rate (Libor) or swap rates for US dollar of corresponding maturity.

This is the third time in the last three months that RBI has cut interest rates on NRE deposits.

On July 17 it had pegged the rate at 250 basis points above Libor. Subsequently, o September 25, it bought this down to 100 basis points over Libor.

The objective was to bring the rates of NRE and FCNR(B) deposits - two liability instruments for the NRIs offered by banks - on a par.

It has brought it down further to ward off arbitrage opportunity which has risen following forwards premiums trading either at a discount or at a very slender premium.

With six-month Libor now veering at around 1.30 per cent, the deposit rate will work out to a shed over 1.50 per cent.

With six-month forwards trading at a few basis points now, the net interest income for an NRI on NRE deposits on a fully hedged basis will be close to 1.5 per cent.

Earlier, even though NRI deposits were offering 2.23 per cent or so (that is 1 per centage point over Libor), the net interest income was around 1.50 per cent only taking into account the cost of six-month forwards.

Sources point out that mutual funds had in the last one month aggressively wooing the NRE money following the redemption of Resurgent India Bonds on October 1.

Most of the money market and debt funds are offering interest rates over 4.5 per cent - much higher than the NRE deposit rates.

Money market funds are one of the safest instruments in the system which offer a higher interest rates than the NRE fixed deposits.

Senior bankers also added that there has been an added inflow into the savings banks account as customers get an interest rate of 3.5 per cent.

The RBI has continuously been paring the NRE deposit rates to check the flow of hot money. It is comfortable with trade inflows but wants to restrict the capital flows.

At present, NRIs as well as foreign institutional investors are allowed to invest in mutual funds both on a repatriable as well as on a non-repatriable basis.