K Kanagasabapathy

Do not run after NRI deposits

K. Kanagasabapathy | Updated on March 12, 2018 Published on December 22, 2011



Remittances should ideally account for a larger proportion of NRI inflows than NRI deposits, as they do not create any external obligation.

In a way signalling a total deregulation of interest rates (after deregulation of the savings deposit rate), the Reserve Bank of India (RBI) announced deregulation of Non-Resident Indian (NRI) deposit rates on December 16, 2011. There is but one difference. This is also a step towards capital account liberalisation, and marks a significant shift in approach to external liabilities management.

The ‘prevailing market conditions'—perhaps, the fast depreciating rupee, and the objective of ‘providing greater flexibility to banks' in mobilising these deposits — provide a context to attracting more funds through this route, minimising, thereby, the pressure on the current account deficit.

An examination of the evidence would show that no significant extra inflows of funds can be expected from this channel. Even if the funds do come, they are a risky proposition for a number of reasons.

Debt creating Flows

First, NRI deposits figure as a ‘debt creating' flow in balance of payments accounts; hence this deregulation encourages such flows, deviating from the current stance on capital account management.

Second, even if NRIs are attracted because of the likely higher return (even without deregulation, the existing deposit rates are more attractive), given the higher cost of funds already faced by banks, besides the maturity and currency risks such deposits carry in their balance sheets, banks may not clamour for such deposits. Only three banks, one in public and two in private sector, all from the southern region, have announced new rates, which are not significantly higher. Third, since these deposits are held in India, the host countries do not provide any insurance cover, nor does India provide this cover, since these deposits are from outside India. The entire credit risk is borne by the depositors. Finally, during periods of crisis and political uncertainties, this source was observed to be very unstable and unreliable.

Remittances More stable

Stability to the external sector has been provided more by ‘private transfers' or workers remittances, as part of ‘invisibles' in the current account. By not being a capital flow, these do not create any external obligation, and to the extent these flows are large the burden of current account gets minimised, providing enormous cushion to meet the otherwise fast-growing deficit in merchandise account. After reaching India, these funds may indirectly strengthen domestic consumption, saving or investment, but there is no external obligation created whatsoever.

Remittances have increased from $2.7 billion in 1980-81 to $3.8 billion in 1991-92, the year of the Gulf crisis, and further to $12.4 billion in 1996-97 and a whopping $53.4 billion in 2010-11. The quarterly flows have not dwindled at any time. As percentage of GDP such flows represent nearly 3 per cent, reducing the current account deficit to that extent.

In contrast, NRI deposit flows in capital account were unstable, particularly during the Gulf crisis. After touching $2.5 billion in 1988-99, they drastically came down to $0.3 billion in 1991-92, creating enormous pressure on the reserves position. In the recent period — despite relatively better returns being offered here than abroad for such deposits, and global financial turmoil and banking crisis abroad — the flow decelerated from $4.3 billion in 2008-09 to $1.1 billion in 2010-11. In relation to GDP, it generally remained well below 0.50 per cent, and in 2010-11 it was only 0.19 per cent (see table).


A comprehensive study by James Gordon and Poonam Gupta (‘Non-Resident Deposits in India: In Search of Return?', Economic &Political Weekly, September 11, 2004) found that these deposit flows were ‘influenced by standard risk and return variables and negatively (by) political and geopolitical uncertainties, such as the government resigning in mid-term or tension on India's borders and also external events' such as financial crises. The current domestic non-economic environment could have a bigger adverse impact on these flows than economic factors.

While many countries do practise some form of discriminatory treatment for non-residents, the special treatment of non-resident ‘nationals' is unique to India.

Evidence shows that this ‘patriotic' approach has not helped in practice.

Recognising this, the second Tarapore Committee on fuller capital account convertibility recommended practically an abolition of this distinction, and said non-resident deposits should be open to all non-residents, subject to KYC norms and differential tax treatment. This is worth serious examination.

As a source of accretion to foreign exchange reserves, the contribution from such deposits has not been that significant. In times of crisis, this does not bolster the reserves position.

An internal working group of RBI (headed by Mr D. Anjaneyulu) in 2004 on external liabilities management recommended that ‘the policy preference should continue to be in favour of equity as against debt, ensuring at the same time that an increasing proportion of non-resident flows into the country is in the form of remittances'.

Since then, the RBI has introduced several measures to promote easy money transfers across borders, which, in fact, has produced favourable results. This approach should be persevered with.

(The author is Director, EPW Research Foundation. The views are personal.)

Published on December 22, 2011
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