In its efforts to correct the inflationary trends in the real estate and equity markets, the Reserve Bank of India's double-edged sword aimed at non resident Indians could cause a temporary setback in NRE deposits, fear banks.

In its third quarterly review last week, the central bank had directed its member banks not to issue loans to NRIs against their NRE and FCNR (B) deposits, and also lowered the interest rate on their deposits. The interest rates on NR(E) RA and FCNR (B) deposits witnessed a drop by 50 basis points and 25 basis points respectively.

These steps were taken to prevent any further speculative investment indulged in by NRIs in the Indian realty and equity market. A number of loans that have been extended by banks to NRIs cross Rs.20 lakh, and credit flows of this magnitude had to be curtailed, argues the RBI.

On the other hand, genuine investors could be affected too by these measures. Interestingly, some private banks in Kerala like the Federal Bank, South Indian Bank and the Lord Krishna Bank had actually raised interest rates for NRIs a month ago with a view to attracting funds from them.

Banks are disappointed with this lowering of the interest rate on NRI deposits, fearing a slowdown in deposits from its most 'high-value' customers.

As for NRIs, they can continue to invest in the high risk, high return equities at the stock exchange, or go in for the low risk, low return, bank deposits.

For financial experts, it would be a challenge to devise a product for NRIs that would give them high returns from a sector which would serve the nation's larger interest as well, such as infrastructure, while assuring a minimum level of return. Value-added options like easy liquidity and quick withdrawal from the scheme would further encourage money flow back to the banks.

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