by Moiz Mannan
With interest rates on bank deposits still quite high and the capital markets expected to keep zooming, it seems to be a choice between the good and the better for non-resident Indians wanting to invest money back home.
A large number of NRIs, though, seem to have opted for the better as bank deposits from them have seen a decline ever since the stock markets started their upward journey. Although, the interest rates on NRI deposits have hovered above nine percent, the surge of around 17 per cent in stock returns appears to have caught the diaspora’s fancy.
According to a report in the Economic Times, inflows through various NRI deposit schemes — including foreign currency non-resident (banks), or FCNR(B), non-resident external (NRE) and non-resident ordinary (NRO) accounts — ave halved in the first six months of the current fiscal.
Total NRI deposit inflows fell 53.3 percent to $6.4bn in April-September from $13.7bn in the year-ago period. Inflows into NRI deposits peaked at $38.4bn in the financial year 2013-14, which amounts to a monthly average of $3.2bn. In comparison, inflows during April to August 2014, or the first four months of the current financial year, stood at just $7.16bn, or a monthly average of $1.79bn.
Expectations of a hike in interest rates in the US put the brakes on NRI deposits, which had witnessed a surge after 2011 because of the RBI’s incentives to manage the current account deficit and stabilise the faltering rupee. Under the scheme the RBI promised to swap dollars received by banks in FCNR deposits against rupees for the period of the deposit at an interest rate of 3.5 per cent a year.
In effect, therefore, banks were paying a forward premium for the dollar of 3.5 per cent a year, which was much lower than the market SWAP rate that the determined the ceiling rate on the deposits. The RBI’s measure amounted to subsidising the banks which could then mobilize FCNR deposits at lower rates. The banks went all out to mobilize such deposits during the September-November 2013 period as a result of which, the outstanding FCNR(B) deposits, which stood at $15.2bn at the end of August 2013 rose dramatically to $40.4bn by the end of December 2013.
Now, commercial banks are themselves not too interested in pushing these deposits aggressively as the RBI sops on FCNR(B) deposits, to attract foreign currency flows have been withdrawn. A few months later, the government led by Narendra Modi took charge at the centre and stock markets began their upward journey.
It was the domestic sentiment as well as favourable global realities that lifted the markets in equal measure. Not just the stock market returns, but bonds and debt products have also become attractive for NRIs. Now, a bond issued by a top-rated company for maturity of two to five years earns around 9 percent.
On the last trading day of last week, the 30-share Sensex surged 267 points to end at 28,335 and the 50-share Nifty gained 75 points to close at 8,477.
Earlier, the Sensex touched the life-time high level of 28,360.66 and Nifty reached all-time high mark of 8,489.80. Banking shares public as well as private sectors were in demand leading to gains of up to 4 percent after the Kotak Mahindra Bank announced that it was acquiring ING Vysya Bank in an all-stock deal.
Now that the media and the marketplace are agog with success stories, it is hardly surprising that investors would want to join the Bull Run. A few prudent investors, or shall we say lucky ones, entered the markets when indices were low. They have made a pile now. However, the good news for those who didn’t time it well is that the outlook remains bullish.
Nearly all market assessors and rating agencies have given a thumbs up to the Indian economy and there is unanimity in the belief that the worst is over for now. Marketmen are expecting the BSE Sensex to touch the 30,000 mark in the foreseeable future.
Those who buy stocks at the current levels that seem high, can still make money by being carefully selective. Experts advise NRI investors to look at the stock rather than at the company. A cursory analysis of the present rally shows that the large corporates and big brand names have not made as much money for investors as have the relative smaller and rather unknown names. Midcaps are the flavour of the season, friends. So go for it.
The Peninsula
