Consumer Confidence Still High in India

There is no lowering of consumer confidence (unlike in the U.S.) in Indian banking as far as the diaspora is concerned. At a time when many overseas banks are
struggling to raise liquidity to stay afloat, non-resident Indians (NRIs) are reposing their faith in Indian banks and betting on the rupee having bottomed out. Lured by higher returns (the last time I checked, the interest rate on savings was 15%!!!), NRIs have poured in $513 million in NRI deposits in September this year — the highest since December 2006.

NRIs have infused a total of $513 million (on net basis) through its major schemes — 1. foreign currency non-resident (banks) or FCNR (B)
2. non-resident external (rupee accounts) or NRE(RA)
3. non-resident ordinary (NRO) accounts. Significantly, bulk of this has hit the NRE(RA) scheme
This reflects the attractiveness of rupee-denominated deposits to NRIs.

NRO deposits that are not repatriable and are meant for local use by NRIs. During April-September this year, banks raised a cumulative $787 million through various NRI deposit schemes as compared to an outflow of $78 million in the year-ago period. Bankers say that it is largely a case of flight to safety towards Indian banks by the diaspora, which has been accelerated by deposit rates becoming more attractive. Since mid-September, Reserve Bank of India (the central bank in India, similar to the Federal Reserve in U.S.) hiked the cap on returns offered on NRI deposits thrice.

The pattern of deposits mobilized indicates that depositors have preferred to park more in NRE (RA), where the currency risk is borne by the depositor. They are at the same time also shunning FCNR (B) deposits where there is no currency risk for the depositor. Earlier, NRI deposits had lost sheen as NRIs preferred the remittance route and earned a higher return on their investments in local fixed deposits, equities and realty through their relatives. Relatives, in turn, could send back up to $200,000 a year!

Interestingly, depositors’ current preference for NRE (RA) has strengthened at a time when the rupee is weakening against the dollar. Since the currency risk is taken by the depositor, whenever the rupee appreciates he gets to take home more dollars in addition to the interest income on the deposit.

Standard Chartered Bank expects the rupee to strengthen further against the dollar in the next financial year. It has projected the local currency at Rs 45 per dollar in 2009-10. Standard Chartered Private Bank global head of NRI Shiv Khazanchi said in Kolkata: "We expect India’s balance of payments to improve to $10 billion in 2009-10 from a negative $11 billion in 2008-09. With this, the rupee is also likely to appreciate to Rs 45 per dollar in 2009-10."