by Moiz Mannan
The inevitable has happened. Although pushed ahead thanks to two extensions, the RBI’s largesse to non-resident Indians, aimed at stabilising the rupee and increasing foreign currency inflow, has at last been pulled back, and overseas Indians will now have to rethink on plans to make money grow in India.
Ever since the Indian currency started its spiralling fall last year, the Reserve Bank of India and the Finance Ministry had tried several measures to make it more lucrative for NRIs to plant money in India. Indeed the measures worked and overseas Indians put more money into bank deposits than they had ever before.
In particular, the move to deregulate interest rate ceilings on NRE (non-resident external) accounts with banks in India and that to introduce a special swap window for FCNR (foreign currency) dollar deposit gave NRIs the promise of returns as high as nine to 12 percent and they lapped it up.
It was always a temporary measure though. First it was to be pulled back in December 2013 and then in January 2014. However, a sudden fresh bout of currency volatility following the US Fed’s tapering move saw the Indian authorities add another month to the special offers. Now, however, the RBI has finally moved in and done away with the swap window as well re-introducing the cap on interest rates.
“With effect from March 1, the interest rate ceiling will revert to the position prior to August 14, 2013, which means that interest rates offered by banks on NRE deposits cannot be higher than those offered by them on comparable domestic rupee deposits,” the RBI said in a statement.
According to an August 2013 directive, banks were free to offer interest rates without any ceiling on NRE deposits with maturity of three years and above. The apex bank had removed the cap on banks limiting interest rates on NRI deposits in a bid to increase foreign exchange reserves and stem the fall in the value of rupee against the US dollar.
Before the cap’s removal, NRE rates were between two and five per cent per annum. When the cap was removed, many banks offered interest rates ranging from nine to 11 percent for NRE fixed deposits depending on the deposit period.
Earlier this year, the US Federal Reserve decided to cut its bond purchases further by another $10bn. It has decided to purchase $65bn per month of mortgage backed securities and longer-term treasury securities as against $75bn per month earlier.
Following the announcement, forex market across the globe witnessed volatility.
To shore up dollar inflows to contain current account deficit and to stem the resultant fall in the rupee, the central bank had on August 14 had lifted the interest rates ceiling on FCNR(B) deposits up to November 30 last year. This was further extended in December 31 and later to January 31.
Accordingly, the RBI allowed banks to offer Libor/swap plus 200 basis points on such deposits of one-three years and Libor/swap plus 300 basis points on three-five years bucket. In the interim budget speech, Indian Finance Minister P Chidambaram said the Indian rupee has fared better than currencies of other emerging economies and the exchange rate has stabilised. “Among the emerging economy currencies, the rupee was affected the least when the actual reduction took place in December 2013 and January 2014,” the finance minister said.
Latest data from the RBI show that NRI deposits garnered inflows of just $1.28bn, a massive fall of $12bn from the previous month. The steep fall was led by a drop in foreign currency non-resident (FCNR) deposits for which the central bank had opened the concessional swap window. FCNR deposits saw an inflow of a mere $778m in December against a huge inflow of $14.93bn in November, reports Financial Express.
Faced with a rapidly falling rupee in September, the RBI announced special swap windows through which banks can swap the dollars raised through FCNR deposits with the RBI at a swap rate of 3.5 percent, far lower than the market rate of around 7.5-8 per cent. During September and November when the swap window was operational, FCNR deposits saw a cumulative inflow of $24bn. Banks had even structured leverage products and offered NRIs cheap loans tied to FCNR deposits through which the customer could earn a decent spread.
Even as FCNR deposit inflows surged, those from non-resident rupee accounts declined. Quoting bankers, the FE report further said some of the NRE funds were being diverted to FCNR deposits to take advantage of the swap window.
In fact, in October and November, NRE deposits saw an outflow of $76m and $109m, respectively. December has seen an improvement as NRE deposits saw an inflow of $504m.
Inflows into NRE deposits may dwindle further as banks will have to cut rates going ahead as the RBI has decided to roll back the leeway through which banks could offer rates on NRI deposits that are higher than those of domestic deposits.
Under the circumstances, NRIs should consider the brief bonanza as a gift from global uncertainties and, having made a packet, move on to more stable, longer term investment options such as debt funds, bonds, gold and indeed, real estate.
The Peninsula
