NRE deposits set to emerge as most attractive option for NRIs in 2013

Likely to continue attract higher infows compared with FCNR(B), NRO

In a scenario where global interest rates may continue to remain low, Non-Resident (External) Rupee Account (NRE) with banks are set to emerge as an attractive option in 2013 for parking funds by Non-Resident Indians (NRIs) due to benefits of higher interest rates, repatriability and being tax free deposits.

In fact NRE will continue to attract higher inflows compared with Foreign Currency Non-Resident Account (Banks) or FCNR(B) and Non Resident Ordinary Accounts (NRO).

Globally most central banks have decided to keep interest rates low with a view to kick start economic growth.

“People have been transferring funds from NRO to NRE accounts because NRE accounts are tax free and repatriable. In NRO account interest income is taxed at source,” said A Surendran, head of international banking, Federal Bank. The principal of NRO account is non-repatriable but current income such as interest earnings on NRO deposits are repatriable.

This was the case even with FCNR (B). “There were instances of conversions happening from FCNR (B) to NRE account due to higher interest rates offered in NRE deposits. People were willing to take currency risks as rupee had depreciated. So they converted it into a rupee deposits earning a higher interest rate,” said NS Venkatesh, chief general manager & head of treasury, IDBI Bank.

Last December the Reserve Bank of India (RBI) had deregulated interest rates on NRE and NRO with a view to providing greater flexibility to banks in mobilising non-resident deposits. The deregulation resulted in banks offering rates to NRIs at par with domestic deposit rates while interest rates on bank deposits offered by most developed countries continued to hover in the 0.2-3.2% range. However, the RBI had said that the rates offered in NRE and NRO deposits cannot be higher than domestic term deposit rates of similar maturities.

Similarly in May FCNR (B) deposit rates were made attractive by the RBI. For 1 year to less than 3 years maturity period the interest rates were revised to LIBOR/Swap plus 200 basis points from LIBOR/Swap plus 125 basis points and for 3 - 5 years maturity period it was revised to LIBOR/Swap plus 300 basis points compared with LIBOR/Swap plus 125 basis points earlier.

However, the deregulation did not help much as far as the NRO scheme are concerned. RBI data showed that for the period between April-October, banks attracted inflows worth $ 11,606 million in NRE compared with an outflow of $ 1,323 million from NRO and $ 138 million from FCNR (B). The outflows in NRE in April-October 2011 was $ 1,626 million.

According to Surendran going forward NRE will continue to be attractive and inflows will keep coming. While inflows will keep decreasing in NRO and in FCNR (B) it will be more or less stable in the near term depending upon the movement of the currency.

Interest rates are on the downward trend in India. But despite that NRE will continue to attract flows. “Even if there is a cut of 25-50 basis points in these rates, it will be higher than overseas rates which are quite low,” said Mohan Shenoi, president - group treasury and global markets, Kotak Mahindra Bank.