NRI deposit flows touch record $3.2 bn in April

Increase in interest rates and weak rupee work as magnates

Taking the benefit of high interest rates and a sharp fall in the rupee’s value, non-resident Indians (NRIs) deposited a record $3.2 billion into bank deposits in April.

They had placed a mere $407 million in April a year ago.

NRI deposits had seen inflows of $2.18 billion in March 2012, according to Reserve Bank of India data.

NRI’s brought $11 bn into bank deposits during 2011-12, against $3.2 bn in 2010-11. Their deposits in the banking system stood at $58.8 bn at the end of April 2012, up from $52.3 bn a year before.

Two most prominent deposits where NRIs park money are non-resident external (NRE) rupee accounts and foreign currency non-resident (banks) {FCNR(B)} accounts. In the case of NRE accounts, the amount is kept in rupees. While money is repatriable, the NRI bears the exchange risk while moving money abroad.

As for FCNR-B deposits, the amount is kept in foreign currency. It is also repatriable money. The bank bears the exchange rate risk when money is moved abroad from this account.

This April, NRE deposits garnered $3.75 billion as against an outflow of $277 million in April 2011.

Bank executives said the large amount moved into NRE deposits after banks raised rates in the second half of 2011-12.

RBI had raised the permitted ceiling on these deposits as one step to attract further foreign currency, when the rupee was rapidly losing value against other currencies.

The interest rates in India are high compared with those being offered in developed countries and the Persian Gulf region. NRIs have taken benefit of the difference. Besides this differential, the gain from a weak rupee, even after factoring in foreign exchange risk, also influenced the flows, said a senior executive with a public sector bank (PSB).

The trend for FCNR-B deposits was different. NRIs took out a net $431 million from these in 2011-12, against a net inflow of $1.3 billion in 2010-11. In April 2012, NRIs withdrew $662 million from the deposit base.

A senior PSB official said depositors moved a part of the FCNR-B money into NRE deposits to get the interest rate benefit. But they would be exposed to currency risk, as there is conversion from dollars to rupees when the money moves to NRE deposits.

In May, RBI raised the ceiling from 125 basis points (bps) to 200 bps above the corresponding Libor/Swap rates for deposits with a maturity of a year to less than three years.

For deposits having a three- to five-year maturity, the ceiling has been raised to 300 bps from 125 bps. A senior Syndicate Bank official said the interest rates on FCNR-B deposits are kept a little higher than overseas rates.

NRIs, especially blue collar workers and information technology professionals who are retail customers, respond the most to such rate revisions.

CURRENCY SCENARIO Banks expect the rupee to be volatile in the medium term
Who	Standard  Chartered Bank	Citibank	HDFC Bank	IndusInd Bank	YES Bank
Where  (Rs /$)	58	54.2	55-56	54.5	53-55
When	30-Sep	Sep 30	Sep 30	Sep 30	Sep 30
Why	Possibility of  Greek exit fallout  from Euro zone,  lower domestic  growth & continuing policy paralysis	Global risk-off amid weak domestic fundamentals	Assuming no grave  developments in Euro zone & India holding on to the investment grade	CAD expected to improve with fall in crude oil prices and growth supporting monetary stance	Pressure from global uncertainty and domestic inflation-growth dynamics not supportive enough
Source: Banks

The NRI deposit base of State Bank of India, the county’s largest bank, is about Rs 69,000 crore, up by about Rs 10,000 crore since the end of December 2011.