Non-resident Indians (NRIs) are increasingly depositing money in the Indian banking system. Currently, NRI deposits account for 6.2% of total deposits in Indian banks. Over the last decade, total bank deposits climbed by 10.2%, while NRI deposits increased by 7.2%.
According to Bank of Baroda’s Economist, Dipanwita Mazumdar, interest rate differentials and India’s stable economy in the face of global concerns draw NRIs to these accounts and could be the reasons why Indian banks have become attractive to NRIs. Among NRI deposits, Foreign Currency Non-Resident (Bank) or FCNR (B) deposits have become more popular.
According to the report, NRO accounts have shown significant growth, with a 10-year compounded annual growth rate (CAGR) of 15.2%, outpacing overall bank deposits. There may be several reasons for the same ranging from ease of liquidity, interest rate differential and repatriation issues.
An Non-Resident Ordinary (NRO) Account allows you to repatriate or transfer interest earned on the principal amount deposited, with limits of up to USD 1 million per financial year after paying taxes. Interest earned on an NRO Account is taxable at 30% and deductible at source.
Share of NRO deposits has consistently risen, especially post Covid period. NRO account basically handles domestic revenue like rent, dividends, and pensions earned in India. Thus, an insulated domestic economy compared to global counterparts in terms of growth and policy dynamics could explain this rise.
During the COVID-19 pandemic, NRI deposits surged from US$ 131 billion to US$ 142 billion, despite lower global interest rates. Bank deposits were favored for savings due to less volatility compared to other investments. Globally, increased savings due to uncertainty also led to more funds being deposited in Indian banks. However, as economic activities normalized post-COVID, there was some decline in NRI deposits in fiscal years 2022 and 2023.
On the other hand, Foreign Currency Non-Resident Accounts FCNR(B) that allow repatriation of principal and interest amount fully has witnessed volatility. FCNR (B) deposits have picked up considerably since FY22. Higher remittance flows could be a possible explanation of the same. However, the share of FCNR (B) deposits is still lower than seen during pre-Covid period.
NR (E)RA Rupee Account that can be opened by NRIs by way of remittance from abroad, had also exhibited some volatility. This is basically used by non-residents for transferring foreign profits to India. Muted growth in the global space, stickier inflation and an elevated borrowing cost might have impacted profitability of companies which is reflected in the falling share of these deposits.
NRI deposits are useful both from the point of view of augmenting aggregate deposits of banks as well as bringing in foreign exchange. The flow of funds will depend a lot on interest rate differentials and remittances into the country.
Based on the trends witnessed in the last decade, a growth rate of 9-10% in NRI deposits could be expected in the next five years or so which will keep it aligned with growth in overall deposits which would be in the region of 12-13% and rupee depreciation of 2-3% per annum.