The reason is simple – in December 2011, the rupee depreciated sharply and hit a historic low (54.31 against the dollar). The country was desperate to stem the rupee slide, which forced the RBI to free NRE deposit rates in December and hence attract money from NRIs.
Earlier, NRE deposits interest rates were restricted to LIBOR plus a few basis points. Interestingly, interest from NRE deposits unlike domestic deposits are tax free.
Now again as the rupee has threatened to breach its earlier low achieved in December, the country has decided to reach out to NRIs once again. The RBI has now decided to raise the interest rate ceiling on FCNR (B) deposits from 125 basis points to 200 basis points above LIBOR. Now, a 75 basis hike in FCNRB rates from banks is almost certain.
But this measure is unlikely to have a much effect on the sliding rupee. The drop in the rupee is coming from weak economic fundamentals including growing fiscal deficit and rising current account deficit.
Foreign funds (who bring in dollars) also seem disinterested in the Indian markets and net sold shares worth around Rs 777 crores in April, after buying shares around Rs 44,000 crores in the first three months of the year.
Clearly, the RBI can tweek a few measures to stem the sliding rupee, but cannot expect billions of dollars from NRIs to flow into NRE and FCNRB accounts.
The real problem lies at the steps of the government, which includes a growing fiscal deficit, rising current account deficit, policy paralysis, and a hostile policy towards foreign investors (GAAR and now the Mauritius Treaty Review), which is preventing the dollars from flowing in and the rupee from rising.
It's time to stop depending on the RBI and ensure there's no governance deficit, so we can salvage some pride for the rupee, which at one point of time, was the best performing Asian currency.