In a recent move, international ratings agency Moody’s has upgraded India’s rating for short-term foreign currency bank deposits from
'speculative' to 'investment' grade. While this is going to be of immense help in terms of shoring up foreign inflows into India, there is one more factor that has gone relatively unnoticed. When it comes to shoring up their deposits, one of the most crucial sources for banks are the Non-Resident Indians (NRIs), and Indian banks have been pushing for a greater share of NRI deposits by hiking the interest rates offered to them. There are three different kinds of deposit services that banks offer to NRIs. These are Non-Resident Ordinary (NRO) accounts, Non-Resident (External) rupee account (NRE) and the third one is an account opened under the Foreign Currency (Non-Resident) account banks scheme (FCNR-B).

The banks have recently hiked the rate of interest offered on NRE deposits in a bid to attract more NRI funds. The move came in after the RBI deregulated the savings account interest rates on NRE deposits and NRO accounts (the interest rate on term deposit for NRO accounts has already been deregulated) on 16th December, 2011. Banks are now free to determine the interest rates on both savings
deposits and term deposits of maturity of one year and above with immediate effect. The revised deposit rates will apply to fresh deposits and on renewal of the maturing deposits. The move comes in as a part of the RBI's efforts at shoring up NRI deposits, so that it can combat the menace of a declining rupee much more effectively.

Well, the move is definitely good for NRIs, who can now invest in India at better rates. The rates have gone up from around 3.50-4 per cent that they used to get earlier to almost 9-9.5 per cent now. The SBI’s rate structure, as is illustrated in the accompanying table, throws more light on this move.

Other banks like Punjab National Bank, Kotak Mahindra Bank, Dena Bank, HDFC Bank, IndusInd Bank, etc. have also increased their rates and are offering rates that are somewhat similar to those offered by SBI. In fact, some banks like Development Credit Bank are offering rates up to 10 per cent on the term deposits.

Another significant advantage that NRIs are likely to have going ahead is that once the rupee appreciates, they would be in a position to repatriate a higher number of dollars. For example, if an NRI invests USD 1000 in a deposit for a period of one year, this amount will be converted into Rs 52000, assuming that the conversion value is 1 USD = Rs 52. After one year, the individual will get the interest and the principal amount. Now, the money in rupee terms will again be converted into USD. At the time of maturity, say USD 1 = Rs 50. The individual would tend to benefit, as he/she will now get USD 1040 (assuming on principal) on account of currency fluctuation. Of course, this could work the other way round too, where the individual may get lesser USDs (principal) then what was invested if the rupee depreciates further.

We also spoke to one of the bankers who, on condition of anonymity, said that the move will attract more foreign investments to India. He further added that there may be the possibility of NRIs borrowing money at low interest rates from the developed nations and
investing that in India. Even after hedging his/her position, the individual will get attractive returns. There were also views that this window may soon be closed by the RBI, but it seems that it will last for at least a few quarters.

We believe that the move will not have much of an impact on the banking players unless any bank has a majority of its deposits coming in from NRIs. In the table above, we have shown the total NRI deposits and the total deposits of scheduled commercial banks. It can
seen that for FY11, the NRI deposits comprise approximately four per cent of the total deposits. We believe the impact on the profitability of the banks will be less. The move by the RBI will increase the flow of money in the banks and to some extent will help the rupee to appreciate further.

KEY POINTS:

• Banks are now free to determine the interest rate on both savings deposits and term deposits of maturity of one year and above with immediate effect.
• The move is definitely good for NRIs, who can now invest in India at better rates.
• Once the rupee appreciates, NRIs would be in a position to repatriate a higher number of dollars.