The Reserve Bank of India?s attempts to boost dollar inflows are encouraging NRIs to send money home at a time when foreign institutional investors (FIIs) aren?t too convinced about the India story. Dollar inflows into non-resident (external) rupee accounts of Indian banks have surged in the last two months and bankers believe the flows are likely to sustain. In May, NRIs deposited $2.76 billion in Indian banks, sharply higher than April?s $1.99 billion. In just these two months, NRIs have parked close to $5 billion in banks, higher than amounts seen in a long time.

The RBI deregulated interest rates on NRE savings and term deposit rupee accounts mid-December, following which several banks hiked interest rates on such deposits. The deregulation triggered sharp increases in NRI deposit rates. State Bank of India had hiked its NRE deposit rates to 9.25% from a mere 3.50% in December following the deregulation. HDFC Bank and YES Bank had also hiked their rates by a similar margin. The only RBI condition was that banks could not offer an interest rate higher than the local retail deposit rate. The rupee?s fall of over 14% between February and June, coupled with interest rate hikes by banks, has attracted dollars from NRIs as their returns have increased manifold.

Federal Bank executive director Abraham Chacko says the bank is witnessing unprecedented inflows from expats. ?Our flows have grown and customers are putting money beyond five years too. The majority of deposits are for less than a year,? he said. Federal Bank offers a peak rate of 9.5% for deposits with tenures between one and three years. The bank is targeting a 50% growth in NRI deposits this year over the current base of R13,000 crore.

Chacko said there were NRIs who were also leveraging to invest in these deposits by borrowing cheaper dollar loans and parking them as rupee deposits, to take advantage of the arbitrage opportunity.

After RBI?s December move, NRIs sent home as much as $1.8 billion in January. The rupee had hit a low of 54 a dollar and was expected to weaken further. However, the currency rebounded in February and NRI deposits fell slightly though the pick-up in subsequent months was substantial.

?Inflows could be on the higher side in June also,? said Pawan Bajaj, head of treasury at Bank of India, adding inflows were led mainly by NRIs from the Gulf who typically repatriate money irrespective of the value of the rupee. However, expectations that the rupee could appreciate further may bring in inflows from NRIs in other geographies who are solely investors and repatriate dollars once the deposits mature. The exchange risk on the deposit is borne by the customer.