RBI dangles carrot, but NRI deposits might not match up

  • Rush of funds lenders saw 9 years ago during taper tantrum unlikely this time
  • Bankers said RBI’s easing of rules may trigger fight for deposits

Gopika Gopakumar, Shayan Ghosh
Updated8 Jul 2022
NRIs will avoid deposits if rupee is likely to weaken further
NRIs will avoid deposits if rupee is likely to weaken further(Photo: Mint)

The Reserve Bank of India’s (RBI) decision to remove the interest cap on foreign currency deposits raised from non-residents while setting off a rate war among banks is unlikely to see the overwhelming inflows lenders saw nine years ago during the taper tantrum.

On Wednesday, RBI exempted banks from maintaining cash reserve ratio (CRR) or statutory liquidity ratio (SLR) on incremental foreign currency and rupee-denominated deposits and also lifted the cap on interest rates on these deposits. This will reduce the blended cost of funds for banks by 20-30 basis points, which could be the extent of the increase in rates on foreign-currency deposits.

Losing ground

Experts said that what RBI had done during then-governor Raghuram Rajan’s tenure cannot be compared to the measures taken on Wednesday.

“That one had a swap window, which made it extremely attractive for banks and NRIs to bring in money. However, this time, RBI has not allowed any such window or swap facility, and the deposits are to be brought in at market rates,” said Ananth Narayan, associate professor at SP Jain Institute of Management and Research (SPJIMR).

Narayan said the latest steps could be seen as a pre-emptive move by RBI rather than something that will attract money immediately.

Over the past year, NRIs found it less attractive to invest in Indian deposits because of the rise in yields globally and the risk of a depreciating currency. However, experts said that with RBI raising interest rates and narrowing the interest rate differential with other countries, these NRI deposits may find their way into India.

However, the flows would not be as significant as during the taper tantrum in 2013, when the rupee breached the 68 to the dollar mark and forex reserves depleted to $274.8 billion. RBI had to then announce measures on NRI deposits, which were made attractive with a subsidized fixed swap rate window. The scheme garnered $34 billion.

The swap window allowed banks to buy forward contracts to hedge their dollar exposure for all fresh three-year foreign currency deposits raised from non-residents at a much lower price than what was prevailing in the market.

Bankers said while this relaxation in rules is likely to trigger a fight for deposits, NRIs will be watching the rupee movement as they would avoid putting all their money into deposits if the rupee is likely to weaken further. “There will be some kind of rate war as everybody will try to gather deposits. At what price funds will come will depend on competition,” said Shyam Srinivasan, managing director and chief executive, Federal Bank.

The flow of money into non-resident Indian (NRI) deposits had moderated sharply to $3.23 billion between April 2021 and March 2022 from $7.36 billion in the year earlier. Outstanding deposits have also declined to $139.02 billion at the end of March from $141.89 billion a year ago, according to RBI data.

“With a turn in the global interest rates, deposits in India were relatively less attractive for NRIs. This measure helps in managing the narrowing rate differential and making such deposits more attractive,” said Upasana Bhardwaj, chief economist at Kotak Mahindra Bank.

She expects the rupee to be in the range of 78.5-80 in the near term. The domestic currency strengthened by 12 paise to 79.17 on Thursday.

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