NRI Deposits Double to $6.1 Billion, Fueled by Favorable Rates and Currency Stability

In a compelling financial trend, non-resident Indian (NRI) deposits have witnessed an unprecedented doubling, soaring from $3.05 billion to $6.1 billion during the April-October 2023 period. This surge, as revealed by recent Reserve Bank of India (RBI) data, is attributed to a combination of higher interest rates and a stable rupee, enticing NRIs to engage in various deposit schemes offered by domestic banks.

Understanding the Surge in NRI Deposits:

The surge in NRI deposits is primarily driven by a substantial increase in inflows into foreign currency non-resident (FCNR(B)) accounts. During April-October 2023, FCNR(B) deposits experienced a remarkable turnaround, with inflows reaching $2.06 billion compared to an outflow of $814 million in the same period the previous year. Similarly, non-resident external rupee accounts (NR(E) RA) also witnessed a surge, climbing to $1.95 billion from $1.67 billion.

Factors Behind the Growth:

Analysts attribute the surge to the attractive interest rates offered by domestic banks. The stability of the rupee against other currencies further enhances the appeal for NRIs. Madan Sabnavis, Chief Economist at Bank of Baroda, notes, "Higher interest rates offered by banks could be the reason for the jump in NRI deposits. The stability in the rupee vis-a-vis its other peers has also resulted in higher accretion."

Breakdown of Deposits:

Notably, the highest deposits from NRIs during this period flowed into non-resident ordinary (NRO) accounts, totaling around $2 billion. In comparison, NRO deposits in the same period the previous year stood at $2.19 billion. NRO accounts are utilized by non-resident Indians to manage income earned domestically.

Distinguishing Account Types:

Understanding the nuances of various accounts is crucial. The NRE (Non-Resident External) account facilitates the transfer of foreign earnings to India, while the NRO (Non-Resident Ordinary) account manages income earned domestically. Both accounts maintain deposits in rupees. On the other hand, FCNR(B) is a fixed deposit held in foreign currency, providing NRIs the option to retain funds in foreign currency without currency depreciation risks.

Interest Rates Offered by Banks:

Domestic banks are currently offering interest rates ranging from 6.5% to 7.5% on various NRE term deposits below Rs 2 crore. For instance, the State Bank of India (SBI) offers an attractive rate of 7.1% on NRE term deposits with a 400-day tenor for deposits less than Rs 2 crore. NRO deposit interest rates vary from 3% to 7.1%, while FCNR(B) deposits maintained in US dollars offer rates between 4% to 5.7%, depending on deposit amounts and maturities.

Currency Stability and Attraction for NRIs:

The year 2023 witnessed the rupee's low volatility compared to its emerging market economy (EME) counterparts. Despite elevated US treasury yields and a stronger US dollar, the rupee exhibited a nominal appreciation of 1.6% during April-December 8, 2023. Adjusted for inflation differentials, the rupee's appreciation stands at an even higher 4.5%.

Post-Covid Influences:

Analysts suggest that the accretion in NRI deposits is also influenced by Indians returning to work overseas, especially in the Middle East, post-Covid. The temporary decline in NRI flows during the pandemic has now reversed as people have resumed international work, resulting in a surge in NRI deposits.

The doubling of NRI deposits signifies a robust trust in India's economic landscape, driven by favorable interest rates and a stable rupee. This financial trend not only benefits NRIs seeking lucrative investment opportunities but also augurs well for domestic banks, reinforcing India's appeal as a preferred financial hub.