Free Fall of Rupee and NRI Deposits

Will the easing of interest rates on NRI deposits help to curb falling rupee?
All form of NRI deposits trebled to almost $11 billion in 2011-12 with more than $4b came into the system in the last quarter alone. Among the various deposit schemes, inflow into the Non-Resident (External) rupee account (NRE) itself witnessed a hefty deposit of $7.5 billion throughout 2011-12. This same deposit scheme has indeed witnessed an outflow of more than $280 million during the previous year for the same quarter.

Another scheme which does not permit to repatriate the deposit – Non-Resident Ordinary (NRO) rupee account also witnessed a very good inflow of more than $3.5 billion. Among all the schemes allowed for NRI’s to deposits – Foreign Currency Non-Resident (FCNR) has seen a downside with a net outflow of $431 million in 2011-12 against a net inflow of $1.3 billion during 2010-11. After the RBI relaxed the deposit rate on NRE account during December 2011 and with its most recent hike on the cap of interest rate on FCNR deposits, coupled with the depreciating rupee, it’s much prudent to assume that there will be a steady increase in inflow instead of withdrawal on NRI’s deposits for the near term.

While the government and the RBI are left with less ammunition to contain the continuous depreciation of the rupee, one can expect the NRI deposits will assume a great significance for the short term. Apart from the NRI deposits, the depreciating rupee can be gauged for the betterment of the economy and the market expectation is that the government should immediately start to give the export sops. It’s a blessing in disguise if the government works overtime to improve the export sector, which will not only work for the ever increasing fiscal deficit but also improve individual companies in the export sector.