As global rates rise, NRI deposits decline $ 6.84 bn in April-August

NRI deposits have fallen by US $ 6.84 billion to $ 134.68 billion as of August 2022 from $ 141.52 billion a year ago as interest rates and bond yields in many countries, led by the US, rose from multi-year lows. Deposit flow from NRIs in the five-month period of April-August 2022 came down to $ 1.435 billion from $ 2.44 billion in August 2021. The biggest decline was in the NRE scheme which came down to $ 906 million from $ 2.464 billion a year ago, according to data from the Reserve Bank of India.

The fall has much to do with the rise in interest rates globally, especially the US, and yields. NRIs who deposited money on December 31, 2021 when the rupee was at 74.29 against the dollar are now sitting on a loss as the currency has fallen 10.87 per cent since then. When conversion from the rupee to dollars happens on repatriation, more rupees are required due to the currency depreciation. On top of this, with interest rates rising in the US and other remittance regions, there’s hardly any incentive for NRIs to bring funds to India.

According to a banking analyst, in FCNR (B) deposits, there is no risk of currency depreciation. The liability of the bank is in dollars. “There is a challenge for banks in getting incremental FCNR (B) deposits as globally the rates are much higher as compared to India. There is no attraction for customers to go for FCNR (B) deposits,” he said.

However, in NRE – which accounts for 72 per cent of the total NRI deposits — and NRO deposits there is a currency risk. “When the outlook on the rupee is that it will depreciate, then nobody will put money into NRE or NRO deposits, which are rupee-denominated deposits. The interest rate will not compensate for the decline in the currency,” he said.

The fall has happened despite the RBI announcing several measures to improve foreign exchange inflows. The RBI allowed banks to temporarily raise fresh FCNR(B) and NRE deposits without reference to the current regulations on interest rates, with effect from July 7. This relaxation will be available till October 31, 2022.

Currently, interest rates on FCNR(B) deposits are subject to ceilings of overnight Alternative Reference Rate (ARR) for the respective currency/ swap plus 250 basis points for deposits of 1-3 years maturity and overnight ARR plus 350 basis points for deposits of 3-5 years maturity. In the case of NRE deposits, interest rates should not be higher than those offered by the banks on comparable domestic rupee term deposits.

“I think even during FY22, the flow of NRI deposits reduced substantially. Probably, NRIs found it less attractive to invest in Indian deposits because of the rise in yields globally and the risk of depreciating currency. During the current financial year, there has been further hardening of interest rates globally,” said a banking source. Banks have also hiked the interest rates on NRI deposit schemes in line with the rise in Repo rates.

It has also contributed to the decline in India’s forex reserves which fell by $ 110 billion to $ 532.86 billion since 2021 in the wake of dollar appreciation and capital outflows from India.

Special deposits worth $34 billion were floated in September 2013 against the greenback, following volatility in the markets due to the US Fed’s announcement to taper off its bond repurchase programme. NRI bonds mopped up $30 billion with a three-year maturity. However, this time around, the government has not indicated any overseas bond issues to boost the forex kitty.

“Flows from North America and Europe are primarily driven by individuals operating in the service sector and hence depend on macro-economic conditions of the underlying countries. In normal conditions, a good economic climate drives higher remittance numbers while a weak environment crimps remittance flows,” said an Axis AMC report.

The US is now the largest individual country source of remittances (23.4 per cent of total) overtaking UAE at 18 per cent. This is possibly driving a shift in remittance share from public sector banks to private sector banks (53 per cent market share) and foreign banks operating in India, the report said.

Outward remittances jump 34.57 pc in August

Overall outward flow of money under the Liberalised Remittances Scheme (LRS) rose by 34.57 per cent to $ 2.667 billion in August 2022 from $ 1.982.45 bn in July, according to RBI data. Travel remittances shot up by 44.76 per cent to $ 1.469 billion during the month from $ 1.015 billion in the previous month as flights restarted and visa issues by countries gathered speed. Students took out $ 467 million during the month as against $ 276 million in the previous month. Under LRS, an Indian citizen can take out $ 250,000 every year.