by Moiz Mannan
There has been a fair amount of uncertainty regarding the internal and external influences on Indian stock markets and this has pushed the risk-averse investor towards the stability and security of bank deposits.
Indian expats have, by and large, shown a pronounced tendency to put surplus funds in non-resident bank accounts which, even if unable to give handsome returns, are at least capable of negating the prevalent inflation.
Let’s take a look at some statistics for Q3 2012-13 recently released by the Reserve Bank of India (RBI). The International Investment Position (IIP) is a statistical statement that shows, at a point in time, the value and the composition of (a) financial assets of residents of an economy that are claims on non-residents and gold bullion held as reserve assets; and (b) liabilities of residents of an economy to non-residents. The difference between an economy’s external financial assets and liabilities is its net IIP, which may be positive or negative. Such balance sheet analysis of international accounts helps in understanding sustainability and vulnerability and is useful for analysing economic structure, studying the relationship to domestic sources of financing and other policy considerations. Figures pertaining to the quarter-ended December 2012 show that net claims of non-residents on India (as reflected by the Net IIP, ie International financial assets abroad less International financial liabilities) increased by $10.4bn over the previous quarter to $282bn as at end-December 2012, mainly on account of $10.5bn increase in liabilities. The changes in IIP also reflect the valuation changes emanating from exchange rate movements.
The Indian residents’ financial assets abroad stood at $441.9bn and remained unchanged from the previous quarter. Reserve assets, which remained the major component of international financial assets, rose by $0.8bn to $295.6bn. Direct investment abroad moved up by $2.3bn during the quarter to $118.2bn whereas Other Investment abroad (mainly trade credit, currency and deposits and loans) reduced by $3.1bn.
The International financial liabilities increased by $10.5bn over the previous quarter to $723.9bn. While direct investments in India declined by $3.5bn, portfolio investments in India increased by $4.9bn. Among other investments liabilities, trade credit, loan and currency and deposits (mainly NRI deposits) increased by $6.2bn, $0.7bn and $0.6bn respectively.
India’s total external debt was $376.3bn as of December end, up 8.9 percent from March, on account of long-term and short-term components.
The increase in long-term debt was mainly on account of NRI deposits and commercial borrowings, while short-term debt stood higher on account of trade related credits, RBI said. Within long-term, commercial borrowings accounted for 30 percent of total external debt, followed by NRI deposits at 18 percent and multilateral debt at 13.7 percent.
Continuing rupee fall and higher interest rate saw NRI deposits nearly doubling in the first eight months of 2012-13 to $11.24bn from $6.39bn a year ago, according to the RBI.
Altough though the currency has appreciated from its all-time low, inflows into NRI deposits continue on the back of higher interest rates. After the rupee fall in December 2011, the RBI had deregulated interest rates on NRI deposits, forcing banks to hike rates of such deposits sharply, which now hover over 10 percent, while banks were lowering rates for domestic deposits.
Following the steep fall in the rupee, which began with the downgrade of the US rating by S&P in August 2011, in November, the RBI had raised maximum interest rates on NRE accounts for one-year-plus to Libor plus 275bps.
The RBI again hiked the cap on FCNR interest rates, raising it to 200bps above the Libor for one-three-year deposits and 300 bps for deposits in the three-five year bucket. Last November, net inflows into NRE accounts touched $696m. Non-resident external and non-resident (ordinary) accounts are two different types of rupee-denominated bank accounts allowed by the government for overseas Indians.
While NRE funds are repatriable, NRO money cannot be remitted abroad. On the other hand, FCNR accounts are denominated in forex and the funds are fully repatriable.
According to recent media reports, banks in two of India’s foremost manpower exporting states — Kerala and Gujarat — have reported an unprecedented surge in non-resident deposits. The figure for banks in Kerala, at December-end 2012, was reported to be more than Rs627bn. It grew from Rs459bn in 2011 and Rs370bn in December 2010. Banks in the western state of Gujarat have reported a 22 percent rise in non-resident deposits.
Jumping by Rs57.34bn over the previous year, the total NRI deposits in banks in Gujarat increased to Rs311.79bn. A DNA report quoted the State-Level Bankers’ Committee to state that NRI deposits contributed some nine percent of total deposits in Gujarat.
While it is true that the stocks markets have had their ups and downs of late, the facts not to missed are that the indices have largely remained range-bound and that equity alone will yield handsome returns in the long run.
In this space, we will soon discuss the merits of investing in large cap and mid cap-based mutual funds for really good returns over a period of time.
