The Indian Rupee is staring at a shaky year ahead as nearly $94 billion of Non Resident Indians’ deposits mature. While all deposits may not leave the shores, some could go back given the narrowing of interest advantage that India had over the West. Given that short term deposits of NRI have been gaining over long term deposits, the fall in interest rates may play a significant role.
According to the latest external debt figures released by the Reserve Bank of India for FY’19, of the total NRI deposits worth $130.4 billion, deposits worth $94 billion are going to come up for maturity in the current fiscal year. The figure looks alarmists, but about 90 per cent of such deposits gets rolled over, according to currency market analysts at both banks and other authorised dealers of foreign currency.
But what could be a cause of concern is the share of such of such short-term NRI deposits in total NRI deposits is slowly rising. The share of NRI deposits maturing within a year has gone up from 51 per cent in March 2015 to 72 per cent in March 2019.
Experts attribute this trend to higher returns on short-term deposits in the Indian markets. “ This is largely attributed to the inverted yield curve that has emerged in India for over a year now “ said K N De, managing partner at United Financial Consultants. “ As a result, short-term interest rates are higher than long term rates and this has made short-term rates more attractive for the global Indians.”
Also, the Indian diaspora could be looking at more attractive opportunities with more reforms expected by the new government, according to a senior treasury official with a local bank.
NRIs have been parking their funds in Indian banks largely due to the wide interest rate differential between their country of residence and their country of origin and enjoying on the interest rate advantage. They have option of parking in two kinds of repatriable deposits. FCNR (B) or foreign currency non-resident (banks), where the currency risk is borne by the bank and NRE (RA) or non-resident external -rupee account, where the foreign currency risk is borne by the depositer.
The mix of these kind of deposits as far the investment preference is concerned often depends on the trend in currency movements. Investments in NRE deposits tend to spurt whenever, investors take a view that the rupee will appreciate over the term of the deposits so that the investors also gains on currency movement in addition to the interest rate he earns on the deposit.
But interest rates are expected to fall in future with the Indian central bank signalling an accommodative monetary policy and hence interest differential for the NRI may not remain as attractive in the past.