With rates freed, billions flow in via NRE deposits

Deregulation of interest rates has meant non-resident external rupee (NRE) term deposits, once dubbed ‘dead’ products, are helping banks rake it in.

Between April 2011 and February 2012, banks’ NRE deposits portfolio saw inflows of $5.79 billion (Rs29,616 crore).
That compares with outflows of $281 million in the same period last year, per  Reserve Bank of India (RBI) data.

As much as $2.26 billion, or nearly 40% of the total NRE portfolio, came in just in January and February.

The RBI had said rates on these products cannot exceed those on domestic deposits.
Since then, all major banks aligned their offers closer to the 9.25% local rates.

Similarly, NRO accounts have seen a surge in inflows at $3.91 billion in April-February compared with $1.93 billion a year ago. 

These rates are linked to the domestic rates and are bound to fall when domestic rates begin to moderate.

This would mean the flows into NRE deposits would also eventually moderate.

But bankers do not expect this to happen in the near future.
“Interest rates are not expected to drop dramatically. As a result, I expect flows to continue. The arbitrage between the rates in their country and India will continue to remain even if deposit rates fall by 50-75 basis points. So, even after accounting for foreign exchange risks, it will make sense for them to park money here,” said KVS Manian, president - consumer banking, Kotak Mahindra Bank.

Abraham Chacko, executive director, Federal Bank, said the macroeconomic situation in international markets will also help in pushing non-resident Indians (NRIs) into depositing money back home. In a situation where tensions continue in the euro zone and the US, the Indian GDP is still decent, he said, adding, NRIs would be hoping that the rupee will strengthen and continue to put money in deposits.

NRIs are also expected to play on the depreciating rupee to gain better interest for their dollar deposits.