A Seshan

Wooing NRI deposits makes sense

A. Seshan | Updated on March 12, 2018

NRI inflows can be used as credit for businesses in need of foreign exchange.


Recently, the Reserve Bank (RBI) announced that banks were free to determine their interest rates under Non-Resident (External) Rupee Deposit Account and Non-Resident Ordinary Account. Since the exchange rate risk in respect of the repatriable rupee deposits is borne by the depositor, I am not sure that, in the current situation of currency depreciation, a wealthy NRI will be influenced considerably by higher interest rates on term deposits, unless they are sufficient to provide reasonable returns after factoring in the expected loss in the value of the rupee or the hedging cost.

However, remittances via savings account may increase. The restriction that the interest rates should not be above the ones on comparable domestic deposits is not understandable, since the locals do not face any exchange risk.


Our banks may be trusted to be cautious and observe prudence in deciding on the rates. We have seen this already after the deregulation of savings bank (domestic) deposit rates. The wide range in the rates announced so far by banks in relation to non-resident rupee deposits indicates their calculations on the profitability of mobilising resources.

The impact will be substantial if deregulation is extended also to deposits denominated in dollars and other permitted foreign currencies under Foreign Currency Non-Resident (B) Account as there is no exchange risk. There are varying estimates of NRI wealth abroad, some going up to $100 billion! NRIs who are white-collared professionals are affluent. There is no doubt that there are large savings waiting to be tapped with attractive interest rates.

There could be arbitrage, with the NRIs raising loans in foreign countries for opening a deposit account in India. It happened during the Gulf Crisis of the early 1990s. On an informal investigation, while working in RBI as Adviser (International Finance), I was told about several dollar millionaires in the NRI deposit accounts in banks, particularly the foreign ones. It was called the Indian rope trick by the financial press! What is wrong if the NRI makes money? Arbitrage is not illegal. It is a win-win situation. The resulting inflow will provide the much-needed relief to the rupee in the market. There won't be any impact on money supply as long as the central bank does not purchase the forex.


What will the banks do with the forex deposits? They can lend them to our businessmen who otherwise raise external commercial borrowings on terms that are now determined by the country's low credit rating. Hedging and CDS costs have gone up and external loans are reported to be no less expensive than the domestic ones.

Secondly, it will also be a source of finance to those entrepreneurs investing abroad. Interest rates on deposits in the West are low. The rates in the Bank-Fund Staff Federal Credit Union (BFSFCU) in Washington DC, which has staff (current and retired) of the World Bank and IMF as members, and those of State Bank of India are given in the table. BFSFCU has no non-performing assets, and a deposit there is as safe as investment in a gilt-edged security. The minimum amount for a term deposit is $1,000. Slightly better rates are offered on jumbo deposits where the minimum is $1,00,000.

Some leading banks of the West have been downgraded by rating agencies in the recent period. The taxpayers there are against the State bailing out any financial institution. Our public sector banks have the implicit backing of government. NRIs may consider them safer than the foreign banks.

The corporate sector is going to face great difficulties in honouring its external debt obligations, especially the Foreign Currency Convertible Bonds, in 2012. Our banks can help them if they have the forex resources. The external reserve position is not strong as the available ‘free' amount, after settling all external liabilities, is negligible. According to one estimate, $100 billion will be due for repayment in 2012.


The urgent need is to augment the reserves through exports, cut down imports and attract foreign direct investment (FDI) and NRI deposits. Exports depend on the-rest-of-the-world income and the relative price of our goods. With the depreciation of the rupee steeper than those of competing countries, we have a price advantage in international markets. So, even if the trends in world income are not favourable, our exporters can try to capture as much of the existing market as possible.

The scope for cutting down imports is limited unless the oil-related items are reduced. There is not much R&D effort going into the efficient use of energy.

After oil, gold is the largest import item. At $34 billion it accounted for around 10 per cent of total imports in 2010-11. It is time to discourage its import by enhancing the existing customs levy. Illegal smuggling and hawala transactions of the past may not revive as the conditions have changed.

The trend in FDI this year is encouraging. It should be maintained through policy reforms.

(The author is a Mumbai-based Economic Consultant.)

Published on January 02, 2012

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