Savings potential for NRIs declines

Savings potential for NRIs declines
By Babu Das Augustine, Banking Editor GULF NEWS Published: October 03, 2007, 23:52

Dubai: Non-resident Indian (NRI) deposits, which account for a major share of India's foreign exchange reserves, are declining fast due to the weakening dollar, lower interest rates and the Gulf's rising cost of living.

The Gulf countries, a major source of NRI remittances to India, have been experiencing unprecedented growth in the cost of living on the one hand and the steep decline in exchange rates due to most Gulf currencies' peg to the dollar.

According to the latest statistical bulletin from the Reserve Bank of India, the country's central bank, NRI deposits declined by almost $500 million in the April-June quarter, and the current quarter is expected to post a further decline due to the continuing weakness of the dollar and falling interest rates.

"The saving potential of an average Indian working in the Gulf has come down by more than 30 per cent during the past two years. Although many of them are remitting the same amount or more in dollars, the reduced exchange rates of Gulf currencies are directly hitting their saving potential," said Sudhir Shetty, General Manager of the UAE Exchange Centre.

At the state level Kerala- banks were hit the hardest. According to figures released by the State Level Bankers Committee meeting held in Thiruvananthapuram yesterday, non-resident deposits in Kerala banks amounted to Rs319.95 billion as of last June, which is 34.56 per cent of total deposits in these banks.

Diversification

"While falling rates and the interest rate cap on foreign currency deposits are the main reasons attributed to the decline in deposits, people have also started diverting funds to other investment options such as real estate and the stock market," said a senior State Bank of India official.

Dollar denominated deposits are no longer attractive due to the decline in the dollar's value against the rupee and falling interest rates. Currently, foreign currency deposits pay in the range of 3.8 per cent to five per cent. "NRIs were pumping money into India due to the high interest rate differential. Lower interest rates combined with four to six per cent domestic inflation could mean negative return on bank deposits," said a senior banker.

Although NRI deposits are falling, exchange houses said remittances are not affected. "People with fixed commitments such as mortgages, loans, education costs and other family expenses cannot reduce their remittances. However, with falling exchange rates, people's saving potential has come down. That is reflected in declining bank deposits, " said Shetty.

NRIs in the UAE have lost about 12 per cent of their earnings due to exchange rate losses and about 10 per cent is lost in the increased cost of living. It means that in rupees, earnings have fallen by a minimum of 22 per cent, reducing the savings and investment potential of UAE-based NRIs.