Non-resident Indians will have to live with low returns on foreign currency deposits in the foreseeable future as major Indian banks are set to slash rates on foreign currency non-resident bank (FCNR-B) deposits.
State Bank of India, India’s largest commercial bank, recently cut interest rates on US dollar denominated deposits of one and two-year periods for NRIs by 11 basis points to 2.47%.
If the deposit is withdrawn before completion of one year, no interest will be paid. The bank has also reduced interest rates on its term deposits by 25 basis points to 6.25%.
Many other public sector Indian banks are expected to slash interest rates on their FCNR-B deposits and as well as on NRI rupee deposits, which will also impact the rupee deposits of NRIs.
However, the private sector banks offer higher interest rates on dollar deposits by NRIs in order to shore up their foreign currency accounts.
For example, Federal Bank offers a 2.72% interest rate on its FCNR-B deposits. Unlike rupee deposits, FCNR-B accounts by NRIs do not carry foreign exchange risk as the deposits are parked in foreign currencies.
Financial advisers say NRIs are left with limited options as far as interest rates are concerned. There used to be a rate advantage in India over the western markets, but this benefit is being lost with continuous fall in interest rates in India since the beginning of the year.
Dwindling deposits
This advantage is translated to higher dollar deposits by NRIs. Fresh FCNR-B deposits rose to $725m (£560.3m; €654.3m) in the April-August 2019 period against $597m (£461.4m; €538.8m) in the corresponding period last year.
However, the overall NRI deposits in Indian banks have been on a downward trend. NRI bank deposits dropped to $4.04bn (£3.12bn; €3.64bn) during the period from $5.70bn (£4.40bn; €5.14bn), a fall of about 30%, according to the Reserve Bank of India data.
This was mainly because of a drop in interest rates coupled with appreciation of the rupee against the US dollar during the period. The Non-Resident (External) Rupee Account was the main contributor. These deposits are freely repatriable and tax-free.
The slide in rupee value makes deposits in the currency attractive for NRIs. Exchange value of the Indian currency has been in the range of 69 – 71.60 against US dollar during the April-August period, as against a high of 74 in October 2018.
The Gulf region accounts for a major part of both NRI bank deposits and remittances to India.
