RBI measures to protect rupee to enthuse NRIs, but no immediate effect likely: Experts

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The Reserve bank of India measures to check a steady decline in the rupee by enhancing foreign investments are a welcome move both for the country as well as investors, especially non-resident Indians (NRIs).

But, it's not a quick-fix solution indeed, believe forex analysts and experts.

“We look at this as a proactive move keeping in perspective the background of global financial and geopolitical instability combined with the recent increase in Fed rates and a weakening rupee,” said Shyam Mani, Head-SME and NRI Banking, CSB Bank Limited.

The major challenge faced in the last fiscal year was the continuous outflow of funds from the country, despite India being one of the very few countries that witnessed positive real growth unlike European countries, the UK, and many other advanced economies, pointed out analysts.

“Overall, how policy intervention with its own merits and demerits impacts investor sentiments following its effect on the rupee will unfold with time,” said Amit Pabari, Managing Director, CR Forex Advisors.

Lenders See Silver Lining in FCNR

Among the measures the RBI lined up on Wednesday to boost foreign exchange inflows, there was allowing banks to raise fresh FCNR(B) and NRE deposits without a cap on interest rates.

According to Gaura Sen Gupta, India economist at IDFC First Bank, this measure could enable banks to increase interest rates by 25-30 basis points (bps) on FCNR deposits.

With such new measures in place, both exporters and importers will try out ways to maximise their profit. “Exporters may start selling because the RBI may take more steps to prevent appreciation of the dollar. Importers may buy near term and wait for hedging more to see how the pair behaves in the next few days,” said Anil Kumar Bhansali, Head of Treasury, Finrex Treasury Advisor.

Moreover, at this time of stringent monetary policies by the central banks of other countries, such easing of norms is likely to attract investors. “Western central banks continue to maintain their hawkish stance and any further uptick in inflation numbers will be a negative for the rupee. So, all in all, (it’s a) good move by the RBI, but the global economic scenario will have to fall in place for the move to really materialise,” said Navin Nair, a forex analyst.

Better returns for NRIs

Analysts pointed out that the relaxation of deposit rates will have a positive impact on NRI deposit inflows, as banks will offer higher rates of interest.

“NRIs are likely to get a sweeter deal for their deposits in India now that the upper cap has been removed. This should see some capital flows into India. Also, the move is likely to attract FPIs into the debt segment with enhanced limits and elevated yields,” said Saurabh Goenka, CEO and MD, Zenith FinCorp.

Outstanding NRI deposits rose by more than 12 percent between 2017-18 and 2020-21, but there was a slight drop of 2 percent in the same between 2020-21 and 2021-22, according to RBI data.

On the other hand, the inflow of NRI deposits fell by more than 80 percent in the month of April 2022, at $529 million, compared to April 2021, at $2,822 million.

The last time the RBI introduced such measures to ensure better foreign investment was in 2013 and billions of dollars gushed in. “There was an enormous flow in one shot after the RBI introduced such measures in 2013, but it won’t be so this time,” added Banerjee. The year witnessed a spike of more than 85 percent in NRI deposit flows, compared to the previous year, shows RBI data.