The Reserve Bank of India on Thursday capped the interest on fresh repatriable Non-Resident (External) rupee deposits of one to three years at 2.5 per cent above LIBOR to ensure consistency in rates to NRI deposits.

LIBOR, or London Inter Bank Offer Rate, is the rate of interest at which banks offer to lend money to one another.

The changes in interest rates would also apply to repatriable NRE deposits renewed after their present maturity period, the RBI said in a media release.

The maturity period of repatriable NRE deposits would continue to be one to three years and the interest rate as determined for three year deposits would also be applicable for maturity period exceeding three years, it said.

The capping on interest rates on expatriate deposits would narrow down the opportunities to hedge between local and foreign currencies resulting in a slowdown in dollar inflows, analysts said.

State Bank of India managing director P N Venkatachalam said even with this revised rate, the interest would be attractive provided the rupee was stable.

The interest offered by SBI on NRE deposits was currently pegged at 5 per cent and it would have to come down to 3.75 per cent as the LIBOR was at around 1.2 to 1.25 per cent.

RBI said at present banks can offer Foreign Currency Non-Resident [FCNR-B] deposits in foreign currency and NRE deposits in domestic currency to Non-Resident Indians.

Interest rates on FCNR(B) deposits are subject to a ceiling of LIBOR rates for the corresponding maturities minus 0.25 per cent and generally confirm to global interest rates in foreign currency deposits in US dollar, pound sterling and euro, it said.

Interest rates offered by banks on NRE deposits are more or less at par with rates on domestic rupee deposits, the apex bank added.