Are dollar deposits losing charm?

KOCHI: The growth in dollar deposits with Indian has slowed down considerably in the past few years predominantly because the interest rate arbitrage between India and most overseas markets has narrowed down.

Moreover, the NRIs are finding increasingly good investment opportunities in their resident countries compared with a few years ago.

The fact is that though the Indian banks are witnessing good remittances from NRIs residing abroad, only a small portion of those remittances are getting converted into deposits with the banks.

The non-resident customers are obviously having a lot of choices in their resident countries. “The investment opportunities in their country of residence have become a lot more attractive, of late,” said a top official from Federal Bank.

Analysis of deposits statistics released by Federal Bank reveals that while the total deposits grew by 19 per cent during the past one year, until December 31, 2023, from Rs201,408 crore to Rs239,591 crore, the NRE deposits trailed behind that growth, as it expanded only by 6 per cent, from Rs68,834 crore to Rs72,671 crore during the same period.

Sequentially, during the quarter ending December 31, 2023, the NRE deposits grew only by less than 3 per cent, from Rs70,571 crore to Rs72,671 crore.

With the main markets including the US, having increased their benchmark interest rates in order to curb the run-away inflation, the interest arbitrage between those countries and India has shrunk to as low as 100 to 125 basis points, thus obviating the attraction of parking deposit with Indian banks.

“If you look at some of the banks in the Middle East, the interest rates they pay for US dollar deposits are probably equivalent to what we're paying,” the Federal Bank official said.

Another important aspect is that the opportunities for investment in stock market, real estate, etc has increased considerably over the past few years.

“This is a little bit of a structural shift that is happening in the savings space as structurally the non-resident behaviour post-COVID has changed. It’s not that someone is losing market share or some others gaining it,” said Shyam Srinivasan, the CEO and MD of Federal Bank.