NRIs see arbitrage play in rupee deposits

With domestic interest rates hardening even as fixed income returns fall globally , there is a sudden spurt in remittances from non-resident Indians (NRIs) seeking to arbitrage between local and international rates. Indians are borrowing overseas at low rates and are remitting funds in India for investments. As on June 30, total NRI deposits on various banks was pegged at $53 billion. With the rupee depreciating over 18% in the last six months, non-residents are getting more for the dollar than ever before. Avijit Nanda, president Times of Money, told TOI, "NRIs are seen borrowing overseas at Libor minus rates and invest in

Indian equities, mutual funds and real estate sectors. The FCNR rate for NRI deposits has increased by 125 basis points (Libor+125 basis points) effective from November 23, 2011, thus encouraging NRIs to open deposits in India. Our estimates are that the remittance flows into India have gone up 20-25 % when compared to the same period last year. NRIs are making the most of better interest rates in India."

Private sector banks like Kotak Mahindra Bank and Federal Banks have witnessed over 40% and 30% surge in remittances respectively from the year ago period. According to World Bank estimates, India received $55 billion in remittances in 2010 and Gulf region accounts for almost half of that.

UAE, with two million Indians alone contributed around $6 billion last year. This year, remittances from Gulf are likely to break last year record. "We are also seeing trend where by NRIs are retiring the mortgage loans in India by remitting more out of own funds or out of overseas borrowings. Coupled with the weak rupee they enjoy the interest differential as well, since interest rates are low overseas as compared to India," said, Sudhir Kumar Shetty, chief operating officer, global operations, UAE Exchange, whose global remittance volumes in 2010 were $17 billion. "During the last couple of weeks, we have witnessed a 30% increase in remittance. These are from people who send money for investments rather than domestic commitments," adds Shetty.

"I took a personal loan of 300,000 dirhams (Rs 42 lakh) from a local bank in Dubai at 8% interest rate and bought a flat in Noida. Indian banks were asking me to pay 12% interest rate along with processing fees. The best part is that I don't have to keep the house mortgaged and I will repay the loan in 5 years. Besides, I save interest of 4% annually, translating to overall saving of Rs 13.5 lakhs," said S Pathak, who works with a local media firm based in Dubai.

Although official figures are not available, banking sources say that many Indian are seeking fresh personal loans and office advances in UAE to invest in India.

Source: http://timesofindia.indiatimes.com/business/india-business/NRIs-see-arbitrage-play-in-rupee-deposits/articleshow/10938750.cms