NRI bank deposits surge $10 billion in first half; total NRI deposits in Indian banks reach $121.8 billion
What if foreign funds are pulling out expecting the US Federal Reserve to change its zero-rate monetary policy? Deposits by the Indian diaspora in local banks swelled by $10 billion in the first six months of the current fiscal year, as they looked to seize the advantage of a weak rupee and the interest rate differential between advanced economies and India.
Inflows into NRI deposits between April and September were 55% higher than in the year-earlier period, according to latest data from the Reserve Bank of India. As of September 30, NRI deposits in Indian banks totaled $121.8 billion.
NRIs are allowed to park funds under three categories in Indian banks. These are foreign currency non-resident-bank (FCNR-B), non-resident (external) rupee account (NRERA) and non-resident ordinary (NRO). FCNR-B accounts do not carry foreign exchange risk as the deposits are parked in foreign currencies. For those who put money in this account, the gain comes from interest rate differential. In the case of NRERA deposits, NRIs gain at the time of investment if the rupee is depreciating.
“NRIs are more positive about Indian economy of late than what they had been in the recent past,” said Parthasarathi Mukherjee, Axis Bank’s group executive for corporate relationship group and international banking.
Statistics from the Securities & Exchange Board of India show that foreign investors pulled out $2.88 billion net from Indian debt and equities in the first half of the fiscal year in anticipation of a rate hike by the US central bank, which would give them higher returns than now from investments in advanced economies.
“An important development in the forex market has been the strengthening of the dollar over time. This has been hastened with the expectation of the Fed increasing the interest rate causing the dollar to strengthen as funds keep flowing back to the US,” Madan Sabnavis, chief economist at CARE Ratings, wrote in a report on the rupee.
However, Fed’s decision to defer a decision on increasing interest rate may have prompted overseas Indians to seek higher returns offered by FCNR-B deposits. NRIs get 1.30-2.49% a year on dollar-denominated FCNR-B deposits, depending on maturity profile of these deposits.
The US Federal Reserve’s benchmark rate is near zero. The flow in FCNR-B deposits grew 68% from a year earlier to $1.759 billion in the six months starting April. FCNR-B deposits mostly come from NRIs residing in advances economies who look to take advantage of the interest rate differences as Indian banks offer higher rates.
NRIs parked about 50% more in NRERA accounts with banks such as State Bank of India during the April-September period over the same period last year.
The inflows in these accounts during the period were $7.759 billion. NRERA deposits mostly come from Indians working in the Middle East, where they don’t have much investment opportunities. NRERA accounts have contributed more than three-fourths of the $10-billion incremental inflow as the rupee remained weak during the period, moving between 62 and 66 to a dollar. Remittances usually increase when the rupee is weaker as each dollar, or any other currency, that the NRI sends will fetch him more rupees.