RBI has deregulated the interest rate on NRI deposits of one year or more.
There are some ridiculous definitions for NRIs – they have to deal with “NRE”, “NRO”, “FCNR” and such crap. What you need to remember is that some of the deposits can be taken back, or “repatriated”, in dollars – the others stay in rupees in India. NRE is converted to rupees and interest is paid on it, and returned Why the difference? Because India doesn’t have a convertible currency and loves to play a bureaucratic game.
The rates on such deposits were highly regulated to N percentage points above LIBOR. Now the rate has been left to the banks. Current rates are less than 4%. NRE and NRO accounts are exposed to interest rate risk – if the rupee depreciates, they have to buy back dollars during repatriation at a much higher rate. (NRE deposits pay no Indian taxes on the interest)
There is $52 billion in non resident deposits (around Rs. 275,000 crore) which is about 5% of the banking system’s deposit base of 52 lakh crore. An increase in such inflow will help the rupee.
Sadly, the one-year exchange rate hedge is at around 55.36 (in the currency derivatives marke
Federal Bank – a Kerala based bank that should see inflows from the middle east – has already raised the NRI deposit rate from 3.82% to 6.5%. With the tax waiver the rate is close to a high-tax-bracket Indian deposit.
Update: Karnataka bank now offers NRE deposits at 9.75%.
My take: What a crock of shit this rule was, and is. Indians abroad can send money home but not take it back easily. We restrict interest rates banks pay on such deposits, even when we saddle them with the risk on the exchange rate. We don’t let foreign individuals (other than those resident) even open rupee accounts, even when we are quite in need of inflows. We classify people as NRIs, FIIs, PIOs and other labels which make no sense when we desire their dollars. I hope this entire system is broken down and we can just call people “investors” regardless of country, colour or creed.
http://capitalmind.in/2011/12/nri-deposit-rates-deregulated/
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from a micro/investor perspective, the system certainly looks inefficient and could do with a lot of simplification. But the idea of completely deregulating forex debt inflows is something that any central banker looks at with caution – after Asia ’97, argentina, mexico peso crisis etc…full, completely unregulated convertibility (on capital account) is something you absolutely have to be careful of. always.
this is standard RBI strategy during a looming crisis anyway. during a period of global uncertainty for forex flows, they always free up all types of inflows to quite an extent. My guess is once the crisis has passed, all the caps will be back in place. this is what they have done earlier. For NRI investors this may stink, but from the RBI’s perspective (indeed any central banker), it makes absolute sense.
12.20.11 at 11:05 AM
I don’t think so. It has been time for us to open up the rupee forever. Yes, there were lessons learned in 97. But the lesson was to build up capital reserves. That has been done. The rest is fiscal prudence which has not been followed by the western countries that scolded the eastern economies then. If they can have a free currency today – and they have very little reserves in comparison with their debt – we can as well. The RBI needs to accelerate, rapidly, the process of opening our currency; the game has changed, and it will never go back to theold normal again. The new normal needs new action.
12.20.11 at 11:15 AM
we have capital reserves yet why have they allowed our currency to take such a deep hit? and i read an article in the Mint about banks in Dubai offering loans to NRIs so that they can send it to India .. that article was quite negative on this move .. but yaa i have never really understood why our currency is so badly down when it weathered 2008 ..
12.20.11 at 5:14 PM