At a time when foreign institutional investors are continuing their pull out from India, capital inflows on account of deposits by non-resident Indians have registered a sharp jump. Attracted by higher interest rates, NRIs have deposited over half a billion dollars ($513 million) in the Indian banks in September this fiscal, compared to the withdrawal of $428 million in August.
The total amount of NRI deposits in various accounts rose to $787 million in the April-September period, compared to withdrawals of $78 million in the same period last year, as per RBI?s latest data.
NRI can deposit money into Indian banks through Foreign Currency Non-Resident (Banks) or FCNR (B) account, Non-Resident (External) Rupee Account or NR (E) RA and Non-Resident Ordinary Rupee Account or NRO, among others.
On September 16, when it announced a number of measures to improve liquidity, the Reserve Bank of India deposit rates on FCNR (B) and NR (E) RA accounts by 50 basis points. A month later on October 15, it raised rates on these accounts by another 50 basis points. Following RBI?s move banks including Punjab National Bank and State Bank of India raised deposit rates for NRIs.
Bankers say that apart from higher interest rates, rupee depreciation also encourages NRIs to increase deposits in their rupee as they get more rupees for dollars. ?What we certainly notice is that when rupee appreciates, withdrawals increase from the NRI rupee accounts, whereas when rupee depreciates, deposits increase,? says Punjab National Bank chief general manager Arun Kaul.
Another factor for increase in NRI deposits is that interest rates overseas have gone down, which central banks paring rates to stimulate their economies, whereas in India NRIs are now getting higher rates. The interest rate arbitrage too has increased, which is adding to the inflow.
Large inflows have come in NR(E) RA and NRO accounts, wherein NRI deposits are kept in rupees. Funds in FCNR (B) account, wherein deposits are kept in foreign currency, are also picking up but not as sharply as in the other two accounts. Kaul says there are ?artificial limits? on interest rates that banks can offer under FCNR (B) account. ?Unless interest rates are very attractive, funds inflow will be smaller in FCNR (B) account,? he says. The withdrawals from the FCNR (B) account fell to $7 million in September, compared $311 million of withdrawal in August.
The interest rate ceiling on deposits of 1-3 year maturity under the NR (E) RA account is currently LIBOR plus 100 basis points. For deposits of all maturities under the FCNR (B) account the ceiling is
LIBOR plus 25 basis points. Under this scheme, NRIs can deposit funds in Pound Sterling, US Dollar, Canadian Dollar, Australian Dollar, Euro and Japanese Yen.