NRIs may pump in over $10 bn as rates rise

Non-resident Indians (NRIs) are expected to pump in upwards of $10 billion as banks fall over each other to offer better rates. The rate war is the fallout of Reserve Bank of India's move to deregulate returns on non-resident rupee deposits. 


With big banks now in the game, dollars are expected to flow in as the yield on non-resident external (rupee) deposits is more than three times the return on dollar deposits even after adding the cost of hedging against the risk of rupee depreciation. By going in for a currency hedge, which will cost around 4.5% to 5%, investors are protected against rupee depreciation. 


"I expect $10- $15 billion of inflows to come from the NRE deposits given the rate differential. This could be a game changer for the rupee which has factored in all the bad news so far," said Ashish Vaidya, head of fixed income, currency and commodities trading at UBS. 


"I would expect that even on a conservative basis the deposit collection should be around Rs 40,000cr ($8 billion)," said Abhay Aima, group head, equities and private banking at HDFC Bank. 


He said that HDFC Bank was using this opportunity to increase its presence in the NRI segment, where it has had moderate presence, by offering very competitive rates. HDFC Bank was among the earliest large banks to offer 9% and was followed by SBI and ICICI Bank, which introduced 9.25% schemes. 


According to a banker with amultinational bank, the key to success is the international reach. But for international banks it could be a tradeoff between offering wealth management products with high fees and selling high cost deposits in a falling interest rate environment. "The present rates offered by banks in India provide an arbitrage opportunity for NRIs to borrow overseas and invest in India," said a banker with a multinational bank. 


It is not clear how aggressive Standard Chartered Bank and Citibank will be in raising these deposits. Stanchart's highest return is 8.25% in the 2 years to 31 months maturity. Citibank has come out with a tiered rate structure where it offers between 5% and 8.75% depending on the size of the deposit. Interestingly, Citi's rates drops for deposits over Rs 50 lakh ostensibly to discourage customers from making leveraged deposits. 


Banks can offer NRIs deposits in foreign currency. But such deposits will not address the shortage of dollars in India as the funds have to be deployed in foreign exchange loans. NRE deposits result in immediate supply of dollars which are converted into rupees. 


WHY NRE DEPOSITS COULD SOAR 


They offer a return of over 400 basis points over libor after hedging currency risks. 
Risk takers betting on a stronger rupee in 12 months could make a killing if rupee does firm up. 
The deposits are locked in for only one year. 
Dollar fixed income rates are less than 2%. 
There is uncertainty in global stock markets. 
Non-residents are looking for a safe haven. 
NRE accounts can be opened online. 
There is an opportunity to make leveraged investments as cheap loans are available.