Diapora: Investment


The global economic crisis may have burned the ­global banking sector badly, but Indian banks have been the biggest gainers as NRIs looking for a safe haven for their earnings pumped in over half a billion dollars in September
The deepening financial crisis that’s playing havoc with banks and financial institutions has had no significant impact on Indian banks. There is no crisis of confidence 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, NRIs have poured in $513 million in NRI deposits in September this year ― the highest since December 2006.

According to latest data released in the Reserve Bank of India’s monthly bulletin, NRIs parked a total of $513 million (on net basis) through its major schemes ― foreign currency non-resident (banks) or FCNR (B), non-resident external (rupee accounts) or NRE(RA) and non-resident ordinary 
(NRO) accounts. Significantly, the bulk of this has hit the NRE(RA) scheme, which reflects the attractiveness of rupee-denominated deposits to NRIs. 

This scheme has became the favourite with NRIs as they will get more value for their investments due to the depreciation in the rupee against the dollar.
Overseas Indians: Not enough?
Inviting investments from overseas Indians, Minister of Overseas Indian Affairs Minister Valayar Ravi has said the 30 million strong diaspora’s contribution to the nation’s economy remained below-par, with nearly 40 per cent of the total remittances coming from just 5 million Indians in the Gulf.
In his inaugural address to the convention of the National Federation of Indian Associations in Seattle, Ravi highlighted the unrealised potential of the diaspora in contributing to India’s economic growth.
Arguing it is essential to forge “strong relationships” with the diaspora in an increasingly globalised world, Ravi said their contribution is “much less than what they are capable of”.
“Overseas Indians worldwide who are our brand ambassadors produce an economic output of about $400 billion.
Yet, India’s growth story so far has been driven primarily by the energy and enterprise of domestic companies. The role of the Indian diaspora in India’s economic growth has been much less than what it is capable of,” Ravi pointed out. The investments coming in from India’s varied diaspora, he said, are even less, with NRIs accounting for a modest $10 billion or 5 per cent of the total Foreign Direct Investment flowing into India.
The bulk of the diaspora money is in portfolio investments of a short-term nature and the time horizon a mere 3 years.
The Indian-American Community, the minister said, is far short of its potential.
Though banks raised a tad higher ($525 million) in January this year, a bulk of this was through 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, RBI hiked the cap on returns offered on NRI deposits thrice. The last was a 75 basis points hike last week. At present, return on FCNR (B) deposit is capped at Libor/Euribor/swap rate plus 100 basis points and the return on NRE (RA) is capped at Libor/Euribor/swap rate plus 175 basis points.

The pattern of deposits mobilised 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, non-resident 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. Their relatives, in turn, could send back up to $200,000 a year. 
The pattern of deposits mobilised indicates that ­depositors have preferred to park more in NRE (RA), where the currency risk is borne by the depositor
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 (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.” 

On the other hand, Basix Forex director K.N. Dey is expecting the Indian currency to depreciate firmly over the next 12 months. “Given the global demand for the dollar and the promise of economic stability in the United States under the new president, we wouldn’t be surprised to see the rupee depreciating as much as 10 per cent over the next one year. This is, of course, counting on the possibility of the general elections here in the first quarter of the next year.”

December 2008

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