Non-resident Indians pumped in more money than ever before into the country’s banks this fiscal, betting on a depreciating rupee to boost returns. The cumulative value of deposits maintained by NRIs in the country’s banks soared to an all-time high of $67,018 million in September 2012.
But forex fluctuations have not worked in the favour of all NRIs. The cumulative value of deposits maintained by NRIs in Indian banks rose by $8.1 billion during the first six months of FY13. In contrast, actual fund inflows stood higher at $8.9 billion.
The discrepancy in the quantum of deposits
This does not mean that NRIs have always been on the receiving end of foreign exchange rate fluctuation. In July, NRIs infused $854 million of fresh funds in Indian banks. But the cumulative value of outstanding NRI deposits in Indian banks shot up by around $2 billion, a huge gain for the depositors on the back of foreign currency fluctuation. This came on the back of a 3.5 per cent drop in the rupee exchange rate against the dollar in July from an all-time high of over Rs 57 per dollar in June.
In this regard, the type of account in which NRIs deposited their money also plays a large role in whether they benefit from appreciations or depreciation of the Indian rupee against other foreign currencies. Three types of deposit accounts are available to NRIs: foreign currency non-resident (bank) accounts (FCNR), non-resident external rupee accounts (NRE-RA) and non-resident ordinary (NRO) accounts.
Depositors in NRE accounts would be betting on rupee appreciation against their foreign currency of choice, as their deposits would be maintained in rupees, so appreciation would garner more forex on conversion in their country of residence.
On the other hand, FCNR account-holders would be rooting for rupee depreciation. In case the converse situation occurs, this would result in forex losses for the NRI depositors. In the case of NRO accounts, the deposits would be maintained in rupees and as they are not repatriable, can only be redeemed in rupees.
An analysis of exchange rates during the year reveals that the rupee lost 1.1 per cent against the dollar during January-October 2012. But during April-October, it rose by 5.8 per cent. This highlights how the timing of a deposit, as well as the tenure, can mean all the difference between a significant gain or a sizeable loss on an NRI deposit.
In financial year 2012, NRIs showed a marked preference for NRE and NRO accounts over FCNRs, as the rupee has fallen sharply against the US dollar and other currencies. The quantum of fresh funds pumped into NRE accounts stood at $8.5 billion in 2011-12 and NRO fund inflows amounted to $4 billion. In contrast, FCNRs witnessed outflows of over $600 million.
The trend continued in April-October 2012, with NRE inflows amounting to $11.6 billion, compared to outflows of $138 million from FCNRs and $1.3 billion from NROs. This indicates that most NRIs still expect to see the rupee appreciate against the US dollar and other currencies from its current low levels.
In this regard, it should be noted that against fresh deposits of $10.1 billion during April-October 2012, the cumulative value of deposits maintained by NRIs in Indian banks only rose by $8.2 billion. This indicates that around $1.9 billion of deposits was wiped out during the period, giving NRIs a reason to re-evaluate their strategy.