In an indication that the diaspora continues to repose faith in India amid turbulent times, net inflows from non-resident Indians witnessed a stupendous, over twenty-fold rise to $4 billion in fiscal '09 as these constituents sharply increased their exposure to various NRI deposit schemes.

Notably, inflows in March '09 itself crossed $1 billion, the highest since October '03, and testament to the fact that Indians abroad increasingly sought financial safety of their shores.

Latest figures by Reserve Bank of India show that net inflows through various NRI deposits surged from $179 million in FY08 to $3,999m in FY09. These include inflows through foreign currency non-resident-banks (FCNR-B ), nonresident (external) rupee accounts (NRE-RA) and non-resident ordinary (NRO) deposit schemes.

While FCNR(B) and NRE(RA) are repatriable and hence comprise a part of India's external debt, funds in an NRO account are meant for local use by NRIs and are hence not repatriable. Bulk of the inflows of late have however been through NRE (RA) and NRO schemes.

Nevertheless, inflows through all these schemes result in forex flows into the country. NRIs are often known to shuffle their portfolios between FCNR(B) and NRE (RA) schemes, based on rupee -dollar movements. While a bank tends to bear currency risk on the rupee, the depositor is exposed to risk in dollar movement.

As a result, when NRIs see the rupee strengthening against the dollar, there is preference for NRE(RA), while FCNR(B) is preferred when the rupee is perceived to weaken. "The current surge in NRE (RA) deposits is reflective of the view held by NRIs that the rupee will strengthen further,'' said a senior official with a large public sector bank.

The last time such a huge surge in NRI deposits took place was in Jun-October' 03, when the rupee was strengthening against the dollar. With interest rates also very high relative to their local markets, NRIs not only enjoyed an interest rate arbitrage back then, they also gained from currency arbitrage.

Source: EconomicTimes