How are NRI deposits significant for us
Answers
Answer:
1. What are NRI deposits?
Deposits contracted by overseas Indians with commercial banks in India as an investment are NRI deposits. These were marketed since the eighties when a large number of Indians went abroad initially in the gulf and then to Europe and America giving in to lucrative job offers. With interest rate better than their local markets and an option to repatriate them, these were an attractive investment option and at the same a credible source of foreign 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 nonresident (banks), NRE or non-resident external and NRO or non-resident ordinary accounts. While the former two are repatriable, the latter is meant for NRI’s local 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While NRO deposits are kept back home and are locally withdrawn for domestic spending, FCNR(B) and NRE (RA) are repatriable and the NRIs can take back home the proceeds on maturity.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 rupee 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.