A possible interest rate hike by the US and a stable rupee have resulted in Non-Resident Indians (NRIs) parking lesser amounts in Indian banks as deposits. According to the latest RBI data, NRIs deposited $7.1 billion during April-August this year, 13 per cent lower than the amount they brought in during the same period last year.
The Non-Resident (External) Rupee Account (NRE) has particularly been hit on growing expectations of a rate hike by the US, which could make such deposits less attractive. Inflows into NRE deposits fell by 35 per cent during April-August.
NRE deposits have been an attractive option for non-residents due to higher rates, tax-free interest and absence of any restrictions on repatriation of funds. In 2012-13, for instance, NRE deposits jumped 46 per cent, thanks to RBI’s high interest rate regime.
Globally, interest rates have been low. But with a possible rate hike in the US over the next one year or so, the rate differential between US and India may narrow.
Along with interest rates, rupee movement also has a major bearing on inflows. In the case of NRE accounts, where deposits are maintained in rupees, appreciation of the rupee against a foreign currency benefits depositors. This is because a stronger rupee will ensure higher amounts are remitted to their country on conversion. With the rupee hovering at 60-61 levels for a while now, arbitrage opportunity is low.
Shyam Srinivasan, MD and CEO, Federal Bank, says that it is the arbitrage market within non-resident (NR) remittances that has shrunk this year. Federal Bank, which has a strong foothold in the NR segment, has 8 per cent market share pan-India and more than a third in Kerala, which is the largest market for remittances.
“The NR remittance market is divided into conventional, arbitrage and investor segments. The conventional market, where a person sends money home to his family, is 70-75 per cent of the remittance market. This market is not impacted by the volatility in the rupee or rate cycle.
“It is the other 15 per cent of the market that is driven by arbitrage opportunity. Here, a person borrows money cheap elsewhere, sends it to India and then makes use of the high interest rates. When the rupee strengthens, he pulls out the money,” says Srinivasan.
The investor segment is driven by sentiment. While foreign investors have been pouring money into India, individual investment in real estate or businesses is waiting on the sidelines for the economy to pick up, he notes.
One-time bump upForeign Currency Non-Resident (FCNR) accounts as a category has lost its charm, as rates are much lower, with the ceiling set by the RBI on the basis of Libor/swap rates. Money in these accounts can be held in foreign currency and hence depositors will gain on depreciation of the rupee.
Last year, the RBI opened a special window for swapping FCNR deposits mobilised by banks. By subsidising the swap cost, the RBI made it more attractive for banks to channel funds through this route. It was also a win-win situation for both banks and the depositor. This was because banks offered a leveraged product under this scheme. This was essentially extending an overdraft to the NRI depositor, with a lien on his deposit.
FCNR deposits in 2013-14, went up by $26 billion. This year until August, only $1.5 billion of inflows have come into FCNR deposits.