The slow remittance growth is more of a structural issue than transitory and it would further weaken aggregate consumer demand.
The inflow of external remittances directly impacts aggregate demand and thus banking sector deposits.
Consumer demand in the Indian market may take a further hit as external remittances are expected to remain muted in the current fiscal year 2020-21. The slow remittance growth is more of a structural issue than transitory and it would further weaken aggregate consumer demand, said a report by India Ratings and Research (Ind-Ra). However, the report suggested that the impact will be restricted to a few states, given their skewed shares in foreign remittances. The inflow of external remittances directly impacts aggregate demand and thus banking sector deposits. It is expected that banks with a higher non-resident Indian (NRI) deposit ratio in the total portfolio will be better able to hedge their risk than others.
It is to be noted that India is one of the largest receivers of remittances in the world, however, the share of remittances as a percentage of gross disposable income fell from 3.5 per cent in FY10 to 2.5 per cent in FY19. It has also been found out that the inflows had started to moderate even before the outbreak of Covid-19.
The fall in crude oil prices and stress emerging from the economic recession are believed to be the core reasons behind the low estimates of India’s external remittances this year. Figures released by the World Bank showed that the Indian diaspora constitutes close to 1.6 crore people around the world. Out of this, 55 per cent are situated in the Gulf Cooperation Council, who send nearly 54 per cent of the total remittances to India. According to the bank, global remittances are projected to fall 20 per cent on-year in 2020 due to the economic crisis induced by the coronavirus pandemic.
Meanwhile, despite falling remittances, the deposits are on a rise due to increased savings amid COVID-19 crisis. Indian Ratings added that the banks will be able to manage the risk with stable deposit growth coupled with muted credit offtake, however, in case the inflows continue to slacken, increased withdrawals will heighten risks.