NRIs wary of local deposits with rates outlook cloudy

Non-Resident Indians seem disinclined to renewing or making fresh deposits with Indian banks.

Senior bankers said till the outlook on interest rates becomes clear, NRIs will remain wary of investing in rupee-denominated deposits.

However, they said, these are high net worth depositors who normally invest to take advantage of the interest rate differential. They had also invested in these deposit products on borrowed capital.

The trend is particularly visible in new generation private sector and foreign banks.

The NRI investors looking for interest rate arbitrage opportunities have stopped depositing money. But those who plan to come back to India or have a base here are continuing to maintain or make new deposits, bankers said.

This is because, more then the interest rate arbitrage, what matters to them is a capital base in Indian currency. The branches that continue to witness NRI inflows are located mostly in south and north India, said bankers.

The international benchmark London interbank offer rate (Libor) has shot up from 1.12 per cent a few months back to around 1.9 per cent currently.

This being a global phenomenon, depositors do not gain from interest rate differential. Six-month

Libor is the only rate for one-year NRI deposit. With global interest rates expected to firm up further after the crucial US Federal Reserve meeting on June 29, investors are finding US and euro deposits much more lucrative, said bankers.

To nullify the arbitrage in interest rate differential between overseas currency and the rupee, the Reserve Bank of India has slashed the interest rate on NRI deposit schemes three times since September 2003.

With effect from April 2004, the interest rates on non-resident (external) rupee (NRE) deposits for one to three years, contracted effective close of business in India on April 17 this year, should not exceed the Libor/swap rates for US dollar of corresponding maturity as per the RBI guidelines.