Fund flows into FCNR (B) deposits, meant for non-resident Indians (NRIs), more than doubled this year, illustrating its safe-haven appeal for the diaspora through a year of global geopolitical turbulence. Fresh inflows under FCNR(B), which eliminates currency risk for NRIs, touched $2 billion in April-October, compared with an outflow of $841 million in the same period a year ago, according to the latest Reserve Bank of India (RBI) data published in its monthly Bulletin. Overall, fresh NRI deposits doubled to $6 billion during the April-October period of 2023, from $3 billion in the same period a year ago.
The surge in FCNR(B) deposits can be attributed to relatively higher interest rates offered by Indian banks compared to American banks. The returns offered by the State Bank of India for FCNR(B) deposits were more than 5%, while American banks offered less than 3% returns. Even the average return on deposits in the Gulf countries, which is the major source of NRI deposits, is estimated to be lower than what Indian banks offer. Additionally, there is no foreign currency risk for depositors as it is borne by the banks.
The RBI had temporarily waived cash reserve requirements and statutory liquidity ratio requirements on fresh inflows under the FCNR schemes to attract foreign currency flows, which likely triggered the surge in FCNR(B) inflows. This measure also helped banks earn extra income and allocate resources to higher-yielding assets.
According to Madan Sabnavis, chief economist at Bank of Baroda, the increase in inflows under FCNR(B) deposits can also be attributed to the return of people to work outside India post-Covid, causing an increase in inflows. However, bankers believe that the pace of inflows in the first half of the current fiscal year may not continue.
Apart from FCNR(B) deposits, there is another attractive option for NRIs willing to bear the currency risk. The non-resident external (rupee account) or NRE (RA) scheme has seen a modest increase in inflows to $1.95 billion during April-October 2023-24, compared to $1.68 billion in the same period last year. Bankers speculate that the inflows under this scheme have picked up since August as there is a view that the rupee might not depreciate steeply against the dollar. Some analysts even forecast a stronger rupee next year.
