NRI deposits fail to pick up despite rising rupee

MUMBAI: A rising rupee appears to have failed to catch the attention of NRIs. A stronger rupee gives them exchange-rate benefit when they convert dollars to open rupee accounts. Bankers feel that a lower rate of interest offered on such deposits seems to have taken away the sheen from such deposits, and inflows have slowed down since February. The rupee has strengthened by more than Rs 3.50 a dollar since March this year, as it now trades at Rs 40.50 against the greenback compared to Rs 44.25 in March.

Typically, NRIs park their foreign currency savings in either the non-resident (external) rupee accounts (NR(E)RA) and the foreign currency non-resident (bank) accounts (FCNR(B)). Of these, the FCNR (B) deposits do not involve any exchange-related arbitrage since the accounts are denominated in foreign currency.

NR(E) deposits between February and April 2007 rose to $1,177 million from $807 million in the year-ago period. Things began to change since February. Bankers said there was a net outflow of $213 million in February and indications are that inflows have slowed down after that.

In case of NR(E)RA deposits, once the foreign currency deposit is made, it gets converted into rupees. And, it again gets reconverted into dollars at the time of redemption. Consider this: An NRI had made a deposit of $100 for one year in May 2006, when the value of the dollar was Rs 45.88. This gets translated into a rupee deposit of Rs 4,588. One year down the line, even if there was a zero interest rate, the rupee funds would fetch him more dollars as Rs 4,588 at the current dollar rate of Rs 40.50 would translate into $113.28 on maturity.

Despite this advantage, there seems to be little interest in these deposits. A senior official from a private sector bank said, “Despite the rising rupee, lowering of rates has made such deposits very unattractive and we are rather seeing a slowdown. Also, interest rates have been rising in developed markets, which may seem to be more lucrative.”
According to Bank of India executive director KR Kamath, NRI depositors normally take a long-term view on the rupee. “We expect a growth in such flows, but it has not yet happened,” he said.

It may be recalled that when the rupee started strengthening in early 2002 against the dollar, when interest rates were also significantly higher than the prevailing Libor, NRIs made a killing through interest and exchange rate arbitrage. However, RBI started reducing the interest rate cap of such deposits since July 2003 to discourage inflows.

Of late, RBI has further capped the interest rates. In April this year, RBI has capped the interest rates on the 1-3 year NR(E)RA term deposits at the London Inter-bank Offer Rate (Libor) prevailing on the last working day of the previous month.