The Hindu Business Line : NRIs shifting funds from dollar to rupee accounts

Rising return
NRIs are deploying their money with Indian banks, given the sub-one per cent interest rate regime prevailing in most advanced economies.
NRIs stand to earn as high as 6.8 per cent yield in the case of one-year NRO deposits.

K. Ram Kumar
Priya Nair

Mumbai, March 18 Non-resident Indians (NRIs) appear to be making the most of the rupee’s depreciating trend against the dollar. By liquidating their foreign currency non-resident (banks) deposits denominated in dollars and parking the proceeds in non-resident ordinary rupee (NRO) and non-resident (external) rupee (NRE) accounts, they are laughing all the way to the bank.

The upshot of this arbitrage is that even as there was an outflow of funds aggregating $1.194 billion from FCNR(B) deposits in the April 2008-January 2009 period (as against an outflow of $670 million in the corresponding period last year), the NRO and NRE deposits saw a robust accretion of $2.201 billion ($637 million inflow) and $1.138 billion ($373 outflow) respectively.

Given that sub-one per cent interest rate regime is prevailing in most advanced economies, NRIs are deploying their hard earned money with Indian banks. By not getting adventurous with their investments and sticking to the knitting, they are not only assured of protection of their principal but also earn a decent return from banks in India. Net of tax, NRIs stand to earn as high as 6.8 per cent yield (or pre-tax return of 8 per cent) in the case of one-year NRO deposits. Indians settled overseas are reportedly taking loans to take advantage of the high interest rates on NRO and NR(E)RA deposits. In the case of NRE and FCNR(B) deposits, the one-year returns are 3.87 per cent and 3.12 per cent respectively.

“NRIs pulled out money from FCNR deposits, which are denominated in six foreign currencies including the US dollar, euro, pound, etc, when the rupee started depreciating beyond the 45 levels and deposited the proceeds into NR(E)RA deposits, which are denominated in rupees. NRIs are not only taking advantage of the interest rate differential between India and overseas but also between the three deposit schemes aimed at them,” said a Bank of India official.

In view of the robust inflows on account of NRIs, bankers are of the opinion that the Reserve Bank of India could effectively counteract the country’s declining foreign exchange reserves by increasing the interest rate ceiling on NRE and FCNR(B) deposits further. Since March-end 2008, India’s forex reserves have come down by $62.431 billion to stand at $247.292 billion as of March 6, 2009.

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