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Vimala Vasan

Bank officials in Abu Dhabi told Business Line that there had been an increase in NRE deposits up to 20 to 25 per cent in recent months, mainly due to attractive interest rates ranging from 5.5 per cent to 7 per cent.

ABU DHABI, Nov. 27

NON-RESIDENT external (NRE) rupee (repatriable) deposits from the UAE have gone up in recent months due to the higher interest rates in India compared to dollar rates and the relatively stable rupee.

However, Indian banks could also be losing out on big investments, as NRIs in the higher income group are investing sizeable sums in Libor range accruals offered by foreign banks that promise high interest rates on long term investments.

Bank officials here, who deal with NRI clientele, told Business Line that there has been an increase in NRE deposits up to 20 to 25 per cent in recent months, mainly due to attractive interest rates ranging from 5.5 per cent to 7 per cent.

The relative stability of the Indian rupee and in fact, some degree of appreciation in its value, has induced a number of NRIs to opt for NRE deposits. The repatriability factor has also reassured NRIs that their deposits can be retrieved in dollars at any time, bank officials said.

FCNR deposits have however suffered severely in the wake of a big slide in dollar rates, with FCNR rates currently pegged as low as 1.5 per cent for one year, going up to 2.5 per cent for two years.

Only 15 to 20 per cent of new investments are in FCNRs, mainly invested by expatriates who wish to keep money in dollars, or to meet future requirements of their children's education abroad. Majority of the fresh investments are going into NRE accounts, a bank official said.

Customers with FCNR deposits that are due for expiry are also seeking conversion to NRE accounts due to the higher interest rates, he said. In this scenario, where few interesting and safe investment options are available for expatriates with high liquidity at their disposal, Citibank and some other foreign banks operating in the UAE are offering Libor range accruals through tie-ups with Lloyds Bank, BNP and other institutions.

These third party instruments ranging from six to eight years with principal guaranteed, offer interest rates of six to seven per cent on dollar denominations, with the call back option if Libor rate dips further to below 1.25 per cent.

"These instruments are attractive as expatriates can keep their cash in dollars and also hope to earn higher interest if there is an upward swing in the Libor," an official pointed out.

NRIs are investing sizeable amounts in such instruments over the past few months, the official said. However, the negative aspects are the high exit costs and the long time period for the investments.

The mediating banks may also not take responsibility for any issues to be settled between the buyer and the issuer, he pointed out.

Another outlet being opted for by NRIs with large sums of over $1,00,000 are to hedge risks by investing in NRE fixed deposits and entering into contracts with authorised dealers to buy forward dollars after one year at a fixed rate.

This helps them offset any losses due to further drop in rates, but they also do not gain if there is an appreciation. With the outlook showing no indications of an increase in dollar rates, this is being considered a safe option by many NRIs.

An official at the Abu Dhabi Commercial Bank felt that NRE deposits would be affected if interest rates on rupee deposits drop further.

State Bank of India recently dropped rates to 5.5 per cent p.a. and other banks, currently offering higher rates of 6.25 to 7 per cent, are expected to follow suit by next month.

Depreciation of the rupee could also affect NRE deposits, bank officials said.

Meanwhile, the secondary market for SBI's IMDs has become a sellers dream with high premiums of 12 per cent and above, though there are very few sellers and a large number of prospective buyers, as the interest rates are still attractive for the remaining three-year period.

Mr Sudhir Shetty, General Manager of the UAE Exchange Centre said that regular remittances through exchange centres to meet domestic demands of expatriates was steady, though a rise was expected in the latter part of November and December, due to forthcoming Eid and Christmas festivals.

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