Foreign currency deposits lose sheen due to stable rupee

The flow of total NRI deposits during FY21 was $7.3 bn as compared to $8.6 bn in FY20. This was the lowest flow of NRI deposits since FY17

Flow of deposits from non-resident Indians hit a four-year low in the financial year 2020-21 mainly due to contraction in foreign currency deposits, latest data released by the Reserve Bank of India (RBI) showed.

The flow of total NRI deposits during the financial year 2020-21 was $7.3 billion as compared to $8.6 billion in FY20. This was the lowest flow of NRI deposits since 2016-17 when these deposits contracted by $12.3 billion.

There are three kinds of deposit accounts of Indian banks where NRIs or PIOs (persons of Indian origin) can park their funds — NRE (non-resident external-rupee account), NRO (non-resident ordinary rupee account) and FCNR(B) (foreign currency non-resident bank account).

Deposits in NRE accounts are freely repatriable unlike NRO accounts. Both NRE and NRO accounts are rupee denominated. FCNR(B) are foreign currency accounts — dollar, euro and pound sterling accounts.

The main reason for the slower accretion of NRI deposits is due to contraction of FCNR (B) (foreign currency non-resident bank account) deposits. FCNR (B) deposits contracted by a $ 3.8 billion. FCNR deposits are kept in foreign currencies and interests on such deposits are aligned with global rates.

Bankers said FCNR deposits are no longer attractive to depositors as rupee has not depreciated against the dollar. FCNR depositors gain when the rupee weakens against the dollar.

“Rupee has been quite stable. The exchange is around 73-74 a dollar. Whenever the rupee was trying to cross 74 some inflows have been coming which is arresting the depreciation ,” said Ashutosh Khajuria, executive director and chief financial officer, Federal Bank.

“FCNR depositors are happy when the rupee depreciates because he holds money in dollars. He wants more rupee for dollars which means he wants to rupee to depreciate. But in the last few years they have not seen much depreciation of the rupee. So the attractiveness of FCNR deposits have been reduced,” Khajuria told Business Standard.

In the last financial year – 2020-21 – the rupee appreciated against the dollar by 4% - which explains why FCNR deposits lost attractiveness. In the current financial year, after dropping 2.3% against the dollar in April over March, the against appreciated in May.

The interest rates on FCNR deposits are much lower than the NR(E)RA deposits. NR(E)RA deposits are rupee denominated deposits, and also repatriable like FCNR deposits. In 2020-21, NR(E)RA deposits registered strong growth. RBI data shows growth of these deposits in FY21 was 59% to $8.8 billion, from $5.5 billion reported in FY20.

“FCNR deposits are much lower than NRE rates. The FCNR deposit rates are less than 1 per cent. Because these rates are aligned with global rates of dollar, yen, euro etc. Since rates are lower the only attraction for FCNR deposits is rupee depreciation,” Khajuria added.

Bankers said since FCNR and NRE deposits are freely convertible, depositors have converted their FCBR deposits, which is also a reason for the surge in NRE deposits. Not only such a conversion has taken place after maturity but a depositor can also convert such deposits before maturity since there is no charge associated for such conversion.

Another reason for robust growth in NR(E)RA is that a lot of Indians came back from various countries like the Gulf nations when the Covid-19 pandemic broke out last year. The Indian government had operated Vande Bharat flights from various foreign geographies to bring back Indians. According to bankers, these workers who came back to India  - mostly from countries where they cannot get a citizenship -  deposited their funds in NR(E)RA accounts because it is repatriable, before coming back. This also resulted in NRE deposit flows becoming highest since 2016-17.