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NRI Deposits

 
In September 2013, RBI tried to rein in a weak rupee by offering to swap FCNR(B) deposits that helped to raise foreign exchange inflows and build up out the foreign exchange reserves. With a majority of these deposits maturing this September onwards, there could be a drain on reserves.

1. What are NRI deposits

Deposits con tracted by over seas Indians with commercial banks in India as an invest ment are NRI deposits.

These were marketed since the eighties when a large number of Indians went abroad ini tially in the gulf and then to Europe and America giving in to lu crative job offers. With interest rate better than their local markets and an option to repatriate them, these were an at tractive investment op tion and at the same a credible source of for eign exchange reserves for the country .

2. What are the different kind of deposits ?

There are essentially three kinds of NRI deposits, including FCNR (B) or foreign currency non resident (banks), NRE or non-resident external and NRO or non-resi dent ordinary accounts.

While the former two are repatriable, the lat ter is meant for NRI's lo cal use. While in case of NRE(RA), the exchange rate risk is borne by the depositor, in case of FCNR(B) the bank in which the deposits are made bears the foreign exchange risks.

3. What drives the demand for these deposits?

While NRO deposits are kept back home and are locally with drawn for domestic spending, FCNR(B) and NRE (RA) are repatriable and the NRIs can take back home the proceeds on maturity . Since in NRE (RA) foreign exchange risk is borne by the depositor, it is a more attractive option for the depositor, when the local currency is strengthening. FCR(B) on the other hand is more attractive when the rupee is weakening since the depositor does not have to bear the foreign exchange risk.

4. How were they used to mop up more dollar funds

In September 2013, when the ru pee weakened steeply against the dollar to almost Rs 68 to the dollar, RBI announced a scheme for banks under which the proceeds of FCNR (B) deposits raised by commercial banks to swap with the Reserve Bank for a minimum tenor of three years and over at a fixed rate of 3.5 per cent per annum for the tenor of the deposit. This incentivised banks to sell these deposits aggressively . In the limited period for which the swap was available, banks mobilised close to $22 billion. A bulk of these deposits are coming up for maturity this September that could pose forex management challenge for the central bank.

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