Business Standard

NRE deposits surge on high interest, weak rupee

Image

Somasroy ChakrabartyAbhijit Lele Mumbai

Despite the rupee taking a U-turn and appreciating against the dollar, the lure of high-interest income seems to be attracting Indians staying abroad to park huge sums in India.

According to Reserve Bank of India (RBI) data, in the first nine months of this financial year, non-resident external (NRE) deposit flows to India are estimated at $3,500 million. Industry analysts and market participants, however, said in the past seven weeks, around $4-5 billion NRE deposits have been parked in domestic banks by non-resident Indians.

State Bank of India (SBI) managing director K Krishna Kumar said till mid-February, the bank saw a substantial rise in money coming into NRE accounts, especially into term deposits. This resulted from a sharp rise in NRE term-deposit rates, a weak rupee and a shift of money from savings and foreign currency non-residential (FCNR) accounts. He, however, did not elaborate on how much the bank received in NRI accounts since January. At the end of December, SBI’s outstanding NRE deposit base was around Rs 50,000 crore.

 

Punjab National Bank executive director Rakesh Sethi said the bank saw accretion of Rs 300 crore in NRE deposits since January. However, much of the money has moved from FCNR (B) deposits.

Till a cap was maintained on NRE deposit rates, these rates were ruling at 3.82-3.85 per cent. However, after deregulation, banks began to offer rates on a par with domestic term deposits — 9.25 per cent or more.

NSP Forex director and chief executive Param Sarma said, “While there is no operative data available at this moment to calculate the flow of NRE deposits to India after December, we estimate NRE deposits with Indian banks this year at around $4-5 billion.” Bankers said NRE deposit flows would continue to remain strong for a few weeks more, as RBI might start reversing the interest rate cycle from March/April, prompting banks to cut deposit rates.

However, the pace of growth in NRE deposit flows may slow, as non-resident Indians have already put large amounts of money in deposit accounts with domestic banks.

Krishna Kumar added there was an element of interest rate arbitrage. This led to some non-resident Indians, especially those from developed countries, borrowing low-cost funds and transferring that money as NRE deposits to benefit from the interest income.

RBI deputy governor Subir Gokarn said there was a net increase in the outstanding NRE deposits, as well as substantial movement of money from FCNR (B) deposits into NRE ones.

The rise in total NRI deposits — FCNR, NRE and NRO (non-resident ordinary rupee account) — was $7,153 million in the April-December period, against inflows of $2,349 million in the year-ago period.

Bankers said RBI’s decision to lift the cap on interest rates for non-resident (external) rupee accounts in mid -December had changed the market dynamics for deposits. The central bank’s move was aimed at attracting dollar flows to curb volatility in the foreign exchange market. The rupee lost 20 per cent against the dollar in the August-December period. It has, however, recorded a turnaround since the beginning of this year.

Don't miss the most important news and views of the day. Get them on our Telegram channel

First Published: Feb 17 2012 | 12:12 AM IST

Explore News