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The Reserve Bank of India (RBI) recently put in place a set-up to help Indian importers and foreign buyers of Indian exports pay in rupees. The State Bank of India (SBI) was the first to respond to RBI's liberalised foreign exchange rules. It raised the rates it offers on its Foreign Currency Non-Resident Bank or FCNR(B) dollar deposits by 85 basis points to 2.85 percent. ICICI Bank has followed suit and raised rates by 85 bps to 3.35 percent.

How will this help the banks and how much money can come from all this? According to Dinesh Kumar Khara, Chairman at SBI, multiple objectives -something in the near term, something in the medium term - are intended to be achieved with this initiative.

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“To my mind, this is essentially a step, which is probably intended to reduce the pressure on the rupee and also some bilateral transactions can happen,” he said.

It is important in this case that for a transaction with a particular country the import and export should be similar.

Khara believes, that as there is much interest shown for the Indian rupee across the globe and eventually this opportunity can be used for internationalising the Indian rupee.

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At the same time, the other intention is that if the outflow of the dollar on account of trade can be avoided then it will reduce the pressure on the domestic currency.

The RBI has also made foreign currency deposits more attractive. Last week it exempted incremental foreign exchange currency or FCNR deposits from cash reserve ratio (CRR) and statutory liquidity ratio (SLR) obligations. It also removed interest rate limits on rates that banks can offer for these FCNR deposits. Companies have also been allowed to raise more external commercial borrowings (ECBs) through the automatic route.

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“I think it is too early to really give some indication in terms of how flows will come via FCNR(B) accounts. It is just about two days, but we are very closely watching the scenario and will be willing whatever dispensation has been given by RBI to ensure that we should be in a position to mobilize decent flows into this particular deposit,” he said.

For the entire discussion, watch the accompanying video

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