Non-resident deposits in banks, which contribute nearly one-third of India’s foreign exchange reserves, appear to have lost its zing this year. In the first five months of FY20, fresh deposit flow from Indian diaspora fell 29% amid fall in deposit rates. Indians working in the Gulf, who contribute the maximum to the NRI deposit chunk, are showing preference towards mutual funds as lower returns make deposits unattractive as investments.
NRE deposits between April and August saw an inflow of $4 billion, compared with $5.7 billion in the same period last year, according to latest Reserve Bank of India data. Outstanding NRI deposit stood at $130.5 billion at the end of August while the country’s foreign exchange reserves have crossed $440 billion last week. The non-resident (external) rupee account (NRERA), which is mostly used by expatriates employed in the Gulf, saw inflows dipping to $2.5 billion from $4 billion.
“It’s now easy to invest in mutual funds through various apps. So, this has become our preferred investment choice, especially amid fall in NRE deposit rates,” said a person working in Dubai in a telecom company, requesting anonymity. In the case of rupee accounts, expatriates gain at the time of investment when the rupee is depreciating. The interest rate on NRI rupee deposits fell 0.8-1% over the past one year.
“Major reasons behind the fall in NRI deposit inflow are definitely less attractive interest rates for a majority of maturities, the expectation of further depreciation of rupee and alternative investment opportunities elsewhere,” said K Paul Thomas, managing director of Kerala-based ESAF Small Finance Bank. Kerala has always been a prime destination of NRI deposits. The lower inflows also highlight a possibility of non-renewal of existing deposits give the fall in rates. Nearly $94 billion of deposit is set to mature this fiscal. NRIs are allowed to park funds in two other categories — foreign currency non-resident-bank (FCNR-B) and non-resident ordinary (NRO) account.
FCNR-B accounts do not carry foreign exchange risk as the deposits are parked in foreign currencies. For those who put money in this account, the gain comes from interest rate differential. Although interest rate advantage that India had over the western market has narrowed with continuous fall in interest rates since February, FCNR-B accounts saw $725 million inflows in the period under review from $597 million.
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