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RBI easing norms may arrest outflows from NRE accounts

Non-resident Indian deposits, which showed a decline in the 2021-22 financial year, are expected to increase in the coming months as the Reserve Bank has decided to relax the rules governing non-resident banks in foreign exchange. [FCNR(B)] And non-residential external (NRE) deposits are expected to prevent outflows from NRE accounts and bring more inflows.

Interest rates on NRE deposits are expected to rise in the wake of the RBI’s move.

Total NRI deposits declined to $ 139.02 billion in FY22 from $ 141.89 billion in the previous year. NRE deposits account for a large portion of NRI deposits with arrears of $ 100.80 billion, down from $ 102.57 billion a year ago, in anticipation of rate hikes by central banks worldwide.

Banks will be able to give NRIs higher returns on their deposits. “Removing CRR, SLR and interest rate capping rules for increasing NRI deposits on FCNR-B and NRE term deposits will help reduce the cost of funds and allow banks to give higher yields to customers,” said Shyam Money, Head-SME and NRI Banking. .

State Bank’s NRE deposit rate between one and two years is currently 5.30 percent.

“In a situation where NRI deposits have declined sharply in the last financial year, the RBI’s move will lead to higher foreign exchange inflows and a larger deposit growth for banks,” Mani said. The weaker rupee means more rupee per dollar for NRI customers and hence this short-term window opened by the RBI will greatly benefit NRIs in multiple ways as it coincides with the festive period when most NRIs visit India. “The RBI’s move will block outflows from NRE accounts,” a banking source said.

With the requirement of less cash reserves, banks will have room to increase the cost of land in NRE and FCNR accounts to draw new funds. This means that banks will have more NRI funds at their disposal for lending activities.

NRIs can open an NRE account – launched in 1970 – with funds sent to India through a bank abroad. It is also allowed to transfer from one refundable account and another NRE account or FCNR (B) account. An NRE Rupee account can be opened as current, savings or term deposit. Local payments can be made freely from the NRE account.

Since this account is maintained in money, the depositor faces exchange risk. NRIs and PIOs have the option to credit the current income to their NRE account, if the authorized dealer is satisfied that the credit represents the current income of the non-resident account holder and income tax has been deducted or paid on it.

On Wednesday, the RBI said banks would be allowed to temporarily increase new FCNR (B) and NRE deposits without reference to the current regulations on interest rates effective July 7, 2022. This relaxation will be available for the period till October 31, 2022.

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