T'UMD OF NRI INVESTMENT IN BANK DEPOSITS

Introduction

Evolution of the investment opportunities

available to NRIs and the liberalization policies of the GO1

on NRI investments in India have already been discussed in

thc second ctlnptcr. Tllis cllnptcr is nn ~~LtcmpL to sLudy ttlc

impact of exchange rate variation, and interest rate changes

on N l l I investment in bank deposits. l'llc n~lnlysis relics

upon statistical tools such as percentages, growth rates,

standard deviations, coefficient of variation and standard

errors. Trend equation analyses are also made to find out

statistically the significance of the growth rate of

deposits. Simple and multiple correlation analyses, and

simple and multiple regression analyses with two and more

variables are also used to bring out the relationship and

dependency of deposits on different variables.

NRI bank deposits along with compounded interest

have soared to R6.1,35,000 million by the end of 1988-89,

and' have been growing by a whopping 35 per cent a year.

Official figures normally value such deposits at the current

exchange rate with the steady depreciation of the Indian

rupee. This would mean that the country's debt to NRIs is

doubling every two to three years. At this rate it could

touch Rs.10 lakhs million by the end of Eighth Plan (1991 to

1996). The interest payment alone on this would exceed Rs.

one lakh million a year. This is more than half of India's

export earnings of the year 1987 to 1988.

NRI bank deposits, among other sources, constitute

88.5 per cent of the total inflow from NRIs. About 68 per

cent of the foreign exchange reserves are offset by the

liability on account of the hard currency deposits held by

NRIs.

The NRER Account Scheme was introduced in February

1970 under which NRIs or individuals of Indian origin could

open deposit accounts designated in rupees. They can do so

at the par value prevalent at the tlme of deposit, with

banks in India by remitting funds from abroad. The FCNR

Accoun L Schcme, whl c l ~ was il~Lroduccd 111 Novcml)cr, 1975

permit deposits in designated foreign currencies. The

initial remittances may b r mndr from abroad, or by

conversion of the existing NRER accounts maintained in

rupees with authorised dealer banks.

NRIs, irrespective of the country of residence,

are permitted to open the above said two accounts. Such

facilities are also extended to NRIS living in the

Bilateral Group Countries, such as, USSR, Poland, East

Germany, Czechoslovakia, Rumania, etc.

The NRI account holders can authorise persons

resident in India to operate these accounts under power of

attorney, or other appropriate authority granted by the

NRIs. But such authority should extend only to withdrawals

for local payments in India. As the funds in NRER accounts

are fully repatriable, any payments made from such accounts

are considered as equivalent to approved remittance of

foreign exchange.

It is gratifying tu note that NRER and FCNR

accounts are popular among the NRIs, and the outstanding

balances in these accounts have been steadily increasing in

recent years. As at the end of June 1989, the total NRI I

bank deposits under the NRER and FCNR accounts amounted to

approximatel y Its. 15,788 crores. Of tllrsc , Its. 5,953 crores

were held in NRER accounts, and Rs.9,835 crores in FCNR

accolln tn .

However, the economic survey of the GO1 does not

include these deposits within its computation of the overall

external debt of the country. Under international

conventions, these are also treated as liabilities rather

than assets. In a sense, these deposits are liabilities

because they have to be repaid with interest at the time of

maturity, like any other commercial loan. NRI deposits with

banks in India are lending excellent balance of payments

support to India's economy at this critical juncture of its

development. Here, it is attempted to find out the progress

of the NRI bank deposits using appropriate statistical

tools.

Taule 111.1 discloses the outstanding balances of

NRER and FCNR deposits over a period of 10 years, ie., 1979

to 80 to 1988 to 89. A casual look at the table shows that

in the initial years, NRER accounts; attracted greater NRI

preference for example, during 1979 to 80, out of a deposit

of Rs .fit70 crorcs, I llr sllnrr o I I l ~ r . NI11?1L r~cc~o1111 L wns 77. 0 4

per cent, whereas, that of FCNR account was just 26.06 per

cent. This trend continued upto 1984 to 85. It seems that

the NRIs have relied upon FCNR account from 1985 to 86

onwards. For example, during the year 1988 to 89, of the

total deposits of Rs.15,788 crores, FCNR account has won a

major share, i.e., 62.29 per cent, leaving 37.71 per cent to

NRER account. The overwhelming response of the NRIs to FCNR

account clearly indicates the fact that they bother much

about the exchange rate variation, and that is why two third

of the preference of NRIs is for FCNR accounts.

It is clear from the table that out of tho total

deposits made by NRIsl NRER deposits are in a declining

trend to the extent of 37.71 per cent in 1988 to 89 from

TABLE 111.1

Outstanding Balances of NlWt Account and PUlR Acwunt Deposit

(Rs . in Crores)

Year ending June

Year Ending 31st March -------------

1

1979-80

1980-81

1981-82

1982-83

1983-84

1984-85

1985-86

1986-87

1987-88

1988-89*

Source: Com~iled from the records of the Indian Investment centre ( A Govt. of India Organization), New Delhi and The Economic Times, New Delhi, Thursday, May 18, 1989. p.6, and compiled from the Annual Reports and Bulletins of the RBI for several years.

Total (2+3)

-------------- 4

680.00 (100)

1118.74 (100)

1394.04 (100)

2051.20 (100)

2960.26 (100)

3818.57 (100)

5649.64 (100)

7847.31 (100)

10054.13 (100)

15788.00 (100)

Deposit

Note : Figures in parentheses denote percentages.

76

----------------------------- NRER Account --------------

2

530.00 (77.94)

937.74 (83.82)

1259.04 (90.32)

1679.20 (81 .86)

2254.26 (76 .15)

2863.95 (75.00)

3461.42 (61.27)

4336.20 (55 .26)

5107.00 (50 .80)

5953.00 (37.71)

-

FCNR Account- -------------- 3

150.00 (22.06)

181.00 (16.18)

135.00 ( 9.68)

372.00 (18.14)

706.00 (23.85)

954.62 (25 .00)

2188.22 (38.73)

3511.11 (44 .74)

4947.13 (19 .20)

9835.00 (62.29)

130.32 pcr ncnt: in 1!1Hl Lo HZ. Ilowrvr~r, I.hn I.'l:NIi tlr-~n>~l 1.n

are in increasing trend to 62.29 per cent in 1988 to 89 from

16.18 per cent in 1981 to 82.

The growth rate of NRER deposits from 1979-80 to

1981-82 was 33.43 per cent; but the same had declined to

21.43 per cent during the period 1982-83 to 1988-89.

However, the overall growth rate for the study period was

27.36 per cent. The main reason for this declining interest

may be depreciation in the money value of the rupee. To

identify the relationship between the NRER deposit and

average $ exchange rate, a simple correlation analysis is

made, and the results are presented in table 111.2 . It is

found from the table that there is a strong positive

correlation between the NRER deposits and the average $

exchange rate as referred by the correlation value of 0.98.

The growth rate for FCNR deposit was less than

zero (-0.03 per cent) ip the period 1979-80 to 1981-82

whereas, surprisingly, the growth rate had increased to

70.92 per cent during the period 1982-83 to 1988-89. This

may be mainly due to the changes in the Government policy on

NRI investments in the year 1981-82. Mention may be made

of easy transfer of funds, liberalization in the procedure

and increase in the differential rate of interest up to two

per cent. However, the overall growth rate of FCNR deposit

was steadily growing at a rate of 51.94 per cent annually.

avernge $ exchangc ratc, a simplc correlation is nrrivcd at.

It is found from the analysis that there is a positive

correlation of 0.95 (vide table 111.2) between the PCNn

deposit and the $ exchange rate

TABLE 111.2

Correlation Co-efficient for Exchange Rates and WI Deposits

Correlation Between

Though the growth rate of both the accounts was in

Correlation Co-efficient ('r' value)

FCNR $ Deposit and AER for $

FCNR f Deposit and AI:11 for f

NRER Deposit and AER for $

NRER Deposit and AEIt for f

FCNR Total Deposit and AER for $

FCNR Total Deposit and AER for 2

inverse proportion, the overall growth rate of the total

0.8684

0.7439

0.9831

0.8320

0.9589

0.8736 -

deposits (clubbing both the accounts) was 36.96 per cent for

the period. The growth rate for the first three years of

Source : Computed results from the compiled data.

the study was only 27.03 per cent, and for the remaining

period it rose to 35.44 per cent. Thus, it may be seen that I

the NRI interest in investing in bank deposits shows an

increasing trend.

The average totall inflow of NRI deposits over the

period amountnd to Rs. 5136.18 crorcs, whcrens, tl~c average

inflow under NRER and FCNR accounts was Rs.2838.18 crores

and Rs.2298 crores respectively. It is clear from the

analysis that though the FCNR deposits showed an increasing

trend, the average inflow of deposit was higher in NRER

accounts when compared to FCNH nccounts. This was mainly

due to more inflow of NllER deposits in the initial years of

the scheme.

In ordrr to study thr trcnd and progress in

respect of NRI investment in bank deposits, a simple linear

trend equation is constructed, and the results are presented

in table 111.3.

The trend equation analysis reveals that the

growth rate of NRER deposits (the computed 'b' value 602.02

and ' R ~ ' value 0.9771) is found statistically significant as

proved by the computed 't' value of 18.49. The reasons for

the higher value of the computed trend may be the

liberalization in the investment policy and a margin

interest rate offered by the RBI. Hence, on the whole, the

growth of NRER deposits has been quite promising.

The growth in FCNR deposits is also estimated with

the help of trend equation. The analysis (vide table 111.3)

reveals that the FCNR deposits have positively increased

( ' R ~ ' value 0.7122), with a growth rate of 27.36 per cent

TABLE 111.3

Trend of NRI Investment in Bank Deposits

-

Figures in parentheses denote standard deviations.

Particulars

Average Deposit (Rs.in Crores)

Growth Rate

Trend Value (Y=a+bx)

Standard Error

't' Value

ill2t value Co-efficient of variation

*Significant at 5 per cent level.

per annum, and it is found consistent as the computed 't'

value is significant at one per cent level of probability.

The reasons for the higher value of the computed trend may

be the greater liberalization in the procedure and the

margin interest rates and the decreasing value of the ~ndian

rupee. In the light of the analysis, a simple correlation

analysis is attempted to understand the relationship between

the FCNR deposit and average f exchange rate, and it is

found that there is a strong positive correlation (0.8736)

between them.

Total Deoposit

5136.10 (4596.19)

36.96

5136.1, +146Y . 3 x

224.07

6.56

0.8431

89.18

Type of Deposit --------------------------- NRER Account

2838.18 (1749.28)

27.36

283R.lRt 602.02 x

32.551

18.4945

0.9771

61.63

FCNR Account

2298.00 (2951.79)

51.94

22DR.0Q+ 8 6 7 . 3 ~

194.91

4.45

0.7122

128.45

---

The overall progress of the deposits made by NRIs

is also interestingly on the increase. The trend equation

analysis, fitted for the purpose, shows that the overall

growth rate is found ( 'R2' value 0.8431) statistically

significant, witnessed by the computed 't' value of 6.56.

Currency-rise Analysis of FCNR Deposits

As pointed out earlier, the $ and f are the

designated currencies to operate the FCNR account. Though

two more currencies, viz., Deutsche Mark and Japanese Yen

are further designated by the 601, for the purpose of the

present study, the $ and C are only taken into account,

since the Deutsche Mark and Japanese Yen have been

designated only at the end,of the year 1988.

Currency-wise analysis of FCNR deposits arc made

in table 111.4. It is clear from the table that the average

$ FCNR deposit is 82 per cent, whereas, the average f FCNR

deposit records only 13 per cent for the period. The

analysis reveals that the growth rate for $ FCNR deposit

upto 1981 to 82 was going negatively (-0.01 a ) , on the other hand, the growth rate for the remaining period interestingly

increased to 38.93 per cent. However, the growth rate

(49.52 %) for the overall period of the study shows an

increasing interest of the NRIs in investing $ currency in

FCNR deposits. The poor show of growth rate for the first

three years may be because of the cumbersome procedure and

TABLE 111.4

Outstanding b u n t of ~RER and PCNR Deposits Currency-wise Analysis

(Rs.in Crores)

(31571 J.Yen) Source : Commerce Research Bureau, Interest on NRI Deposits;

Need for Frequent Changes, Financial Express (Daily), 10th September, 1985, p.6 and RBI Annual Report 1988-89, Supplement to the RBI Bulletin, July, 1989,

Year Ending 31st March

---------- 1

1979-80

1980-81

1981-82

1982-83

1983-84

1981-85

1985-86

1986-87

1987-88

1988-89

* Inclusive ** Do not

pp. 96-97. Note : Figures in parentheses are outstanding deposits in

the relevant foreign currencies in millions.

*** Inclusive of Rs.700 crores (848 DM) and Rs.372 crores

NRER* Account

------- 2

530

938

1259

1679

2254

2864

3461

4336

5107

5899

of include

Grand Total (2+5) ---------

6 --

680

1119

1394

2051

2960

3819

5650

7847

10054

14154

--

FCNR ~~count**

accrued tnterest

----------

[IS Dollar ----------- 3

119 (151)

145 (159)

101 (105)

248 (246)

457 (408)

618 (499)

1759 (1419)

3047 (2360)

4406 (3410)

6648 (4245)

nccrucd interest

..................... Pound Stcrling ----------

4

31 (16.4)

36 (20.8)

34 (21.6)

124 (80.7)

249 ( l ( j 4 . 6 )

337 (218)

430 (236)

464 (224)

541 (222)

535 (203)

Total -------- 5

150

181

135

372

706

955

2189

3511

4947

*** 8255

strict rules in the period in allowing the deposits in

India.'

The analysis further reveals that the growth rate

of f FCNR deposit was less than the growth rate of $ FCNR

deposit. The rate of growth of f FCNR deposit for the first

three years of the analysis was only 0.09 per cent. The

rate for the remaining period was picking up to the extent

of 15.74 per cent, but the overall growth rate of the P FCNR

deposit was 32.95 per cent growth for the period. The

increasing trend in the latter period may be due to more

liberalization in the pr~cedures, and higher margin of

interest rates and more depreciation value in the Indian

rupee.

From the simple correlation analysis it is found

that there is a highly positive correlation (0.8684) between

the $ FCNR deposit (vide table 111.2) and $ exchange rate.

Though the growth rate was higher for $ FCNR

deposit than the P FCNR deposit, t h e overall ~rowth rate of

FCNR deposit showed an increasing trend to the extent of

49.30 per cent. It can be inferred from the table 111.5

that the trend equation fitted for the purpose shows a

sizeable growth ('b' value 654.62) in $ FCNR deposit. Due

to the increasing interest of the NRIs in the deposit ('R2

value 0.7704) the growth rate is also found statistically

significant, and it is proved by the computed 't' value of

5.18. The higher value of the computed trend may be becnuse

of the low progress in the initial years of the scheme.

The growth rate for $ FCNR deposit shows that the

deposit has grown at 43.52 per cent nnnualfy. Ilowevcr, it

is found that the growth for the later five-year period is

as high as 70.82 per cent, and that of the former five year

period is 30.88 per cent. This shows that the NRI interest

in ths deposit is picking up at a higher rate in recent

years.

TABLE 111.5

Currency-wise Trend of NRI Investment in FCNR Deposits

Particulars FCNH Account Deposit -----------------------------------------

Designated in US$ I Designated in UK E

Average Deposit (Rs.in Crores)

I Growth Rate Trend Value (Y=a+bx)

Standard Error

' t ' Value

1 ~ ~ 1 Value

Co-efficient of variation

* Denotes Standard Deviations. **Significant at 0.05 per cent level of significance.

Source : Computed results from the compiled data.

To rlndcrstnnrl thr trrnd nnrl progrrss I I I vr.sl~rcl o r

f FCNR deposit, a simple linear trend equation is also

constructed (vide table 111.5). The nnnlysis rcvenls Llrat

the deposit has positively grown ('b' value 68.042) , nnd the

growLtl rnLc ( ' 1 1 2 ' vuluc O.3517) Is Lourld Lo bc sLnllslicalLy

significant ('t' value 12.99).

Though the f FCNR deposit has grown at 32.95 per

cent annually, it is found that the growth rate of the

deposit declines during the second five-year period at 16.53

per cent growth, as against 32.95 per cent growth in the

first five years of the study period. But the growth

increases to Rs.535 crores in 1!jXR, ns ngninst lts.21!1 crorcs

in 1984. It is found that there is a highly positive

correlation between the f FCNR deposit and f exchange rate

(vide table 111.2) for the period as proved by the computed

'r' value of 0.74.

Exchange Rates

The wide fluctuations in the exchange rate may

also influence the NRI deposit in bank accounts. An

attempt has been made to study the trend in exchange rates

of the designated currencies with reference to growth of NRI

bank deposits. A clear picture of the exchange rates in

terms of Indian rupee value and how far these rates vary I

from year to year are presented in table 111.6. It is seen

TABLE 111.6

Average Exchange Rate for $ and f

Source: Compiled from the Economic Times, New Delhi (May 18, 1989, p . 6 ) .

particulars

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

Rupees per unit

Note : Figures in parentheses denote percentage exchange rate variation between years.

Average Exchange Rates (AEB)

US$ (RS. / $ ) *

7.86 ( - )

8.66 (9 .24)

9.46 (8 .46)

10.10 ( 0 . : 1 4 )

11.37 (11.17)

12.38 (8 .88)

12.61 (1 .82)

13 .91 (9 .35)

14.15 (1 .69)

15.49 (8.65)

of Foreign Currency.

........................................ 3 Pound Sterling (Rs. / C )

-

18.29 ( - )

17.56 ( - 4.16)

16.55 ( - 6 .10)

1 5 . 32 ( - H . O : l )

15.19 ( - 0.86)

15.98 (4 .94)

18.48 (13.43)

24.76 (25.44)

25.43 (2.63)

26.58 (4 .33)

from the table that the $ exchange rate has gone up from

Rs.8.66 in 1981 to Rs. 15.49 in 1989, registering a two fold

increase for the period, whereas, in case of f exchange

rate, the growth is by 60 per cent for the period.

The table further reveals that the growth rate of

the exchange rate between $ and Indian rupee for the first

five years was 7.66 per cent. The same declined to 4.58 per

cent for the later five-year period. However, the overall

growth rate of the $ exchadge rate for the period goes up to

the extent of 7.02 per cent. As it is seen from the

analysis (vide table 111.2) there is a strong positive

correlation between the FCNR deposits ( $ and f) and the AERs

( $ and f). The influence of the varintion in the exchange

rate of $ on FCNR deposit is higher in the former five-year

period as proved by the comparative higher growth rate for $

FCNR deposit and $ currency than in the later one. It can

also be referred from table 111.7 that the growth rate for

the $ exchange rate is 0.83 (computed 'b' value). The $

exchange rate has positively grown ( $ 2 ' value 0.9915) and

the growth rate is also found statistically significant by

the computed 't' value of 30.49.

The trend equation analysis for the f currency

exchange rate shows a p~sitive growth for the later five-

year period at 10.37 per cent as against the negative growth

rate (-3.64 per cent) for the former five-year period under

study. However, the overall growth rate for the exchange

rate of the currency was only 3.8 per cent for the period.

To identify the rclntionship bctwccn thc PCNIt deposil and P

exchange rate, a simple correlation is fitted. The analysis

reveals that there is a highly positive relationship between

these' two as computed 'r' value of 0.87. It is also found

that there is a highly positive correlation as proved by the

computed 'r' value of 0.832 between NRER deposit and P

exchange rate.

TABLE 111.7

Trend of Exchange Rates of $ and P

* Significant at five per cent level. Figures in parentheses denote standard deviations.

particulars

Average Exchange Rate

Growth Rate

Trend Value (Y=a+bx)

Standard Error

' t ' Value 2 'It ' Vnlur!

Co-efficient of variation

Exchange Rates ......................................... $ (Rs./$)

11.59 (2.41)

7.02

11.59+0. 83xf

0.0274

30.49

0.9915

20.78

f (Rs./f)

19.11 (4.19)

3.81

19.41+1.09x*

0.341

3 . 2 1

0.51jPH

21.68

The analysis further reveals that the growth rate

of P exchange rate has positively been picking up as

witnessed by the computed 'b' value of 1.0967. The growth

rate of the exchange rate ( ' R ~ ' value 0.5628) for the

currcrlcy is ulso proved Lo bc sLuLlsLicully slg~lil'iuur~L ( ' t'

value 3.21) at 5 per cent level of significance. llence it

can be concluded that there is a highly positive correlation

between the exchange rates for the designated currencies and

the NRI deposits in bnnk accounts.

Regression Co-efficient of Total FCNR Deposits and Average Exchange Rates (BgR) for $ and f

Whether the exchange rate differential influences

the FCNR deposits made by NRIs, can be understood by fitting

a regression equation between them. Accordingly,

considering the sizes of AERs of ' $ I and ' f ' every year as

factors influencing the outstanding as well as the

incremental sizes of FCNR deposit balances, the estimates

are worked out as follows.

A FCNR = - 9152.5 + (436.9) AER $ + (314.32) AER f (122.4) ( 70.26)

An overall 'It2 ' value of 0.9467 shows a positive

and significant influence of changes in AERs of ' $ ' and ' f '

on the FCNR deposit balances. It is mostly because of

f a v o ~ ~ r n h l ~ n l p w vn1110 for ovrry $ d v p o s i t In Inrilnn

investments. On the other hand, the positive regression co-

eificient of exchange rates do confirm the consistent

influence of them in attracting thr FCNR deposits. It is

observed from the 'FI2' value that the inter-relationship

between the variables is good. In addition, the growth of

FCNR deposits is found to be highly dependent on the

exchange rates with the regression co-efficients of 436.9

and 314.32 respectively for AER $ and AER f , and it is found

statistically significant (computed ' t ' value 3.57 and 4.47)

at 5 per cent level of significance. So, it can be

concluded that the change in exchange rates (of course

favourable to NRIs) will result in increased flow of FCNR

deposits, and banks in India can easily mobilise the

deposits from the NRIs on this account.

Regression Co-efficient of Total NRER Deposits and A W s for D and C

To understand the inter-relationship between the

growth of NRER deposits and the variation in the exchange

rates of $ and f , a multiple linear regression equation is

fitted considering the following variables as

Y = Total NRER deposits

X I = AER for $

X2=m fort

Here. the variable 'Y' is considered as dependent,

and 'XI, and X2' as independent variables. A significant

pasitive correlation (0.98) is found between variables 'Y

and XI,' and 'Y and X2' (0 .83) .

The summation of regression equation shows t h a l

NRER = -5874.9 + (589.35) AER $ + (96 .707) AER 2 35.925 20.624

The regression analysis reveals that it is fitted

best with computed 'R" value of 0 .99 showing that the

associntion and inter-rrlntionship is ~ood. It rxplnlns

that the growth of NRER deposits is found to be hi~hly

dependent on the exchange rates with regression co-

efficients of 588.35 and 96.70 for the variables, and it is

found statistically significant (computed 't' value 1 6 . 4 and

4.69) at 5 per cent level of significance. So, it can be

concluded that a fluctuation in the exchange rates is

considered as one of the important factors which affect the

quantum of NRER deposit. Accordingly, a rise in the

exchange rates will automatically increase the NRER

deposit.

Interest Rates

Till 1982, resident accounts and non-resident

accounts were considered alike atleast as far as interest

rates were concerned. Later on, the GO1 has realised the

need for offering higher interest rates for NRI deposits.

As a result, with effect from March 1, 1982 , term deposits

for 'one year and above' made by NRIs carry interest rates

two per cent above the rates permissible on domestic

deposits of comparable maturities.

Though a higher interest rate was offered for NRI

deposits, a uniform rate of interest was maintained for both

NRER and fCNR deposits for sometimes. Later, the GO1

realised the need for offering different interest rates to

these accounts. Since there is an element of exchange risk

associated with NRER deposit, the GO1 came forward to offer

one per cent higher interest rate to NRER deposit than that

ot the FCNR deposit. As at the end of December, 1989, the

interest rate for NRER deposit was two per cent more than

the domestic deposit of comparable maturities, and one per

cent more than the FCNR deposit.

Interest Rates on Domestic Deposits Vs. NRER and PCNR Deposits

The interest rate schedule applicable to domestic

deposits, FCNR deposits, and NRER deposits (table 111.8)

sows that there is no difference of interest rates at all

among the domestic deposits, FCNR deposits and NRER

deposits upto a period of 'one year' for term deposits.

This means that banks pay the same interest rate of eight

TABLE 111.8

comparative Interest Rate Chart: JJmestic D e p i t s V s . FQlR and RRgR Deposits

(per cent per annum)

Source: World Economic Outlook, dated, April '89 published by IMF.

Period

15 - 45 days 46 - 90 days 91 days - 6 months 6 months - 1 year

1 - 2 years

2 - 3 years

3 - 5 years

5 years

Note : Figures in parehtheses denote percentage rate variation from the domestic interest rates.

per cent irrespective of the type of deposits upto a period'

of 'one year'. But, for domestic deposits, the existing

interest rates are 8.5 per cent for a period of 'one to two

years', 10 per cent for a period of 'three to five years'

and 11 per cent for a period of'five years and above'. The

corresponding interest rates for FCNR deposit are 9.5 per

NRER Deposit

3

4

6.5

8

10.5 (19.04)

11 (18.18)

12 (25.00)

13 (15.38)

Domestic Deposits

3

4

6.5

8

8.5

9

10

11

FCNR Deposit

3

4

6.5

8

9.5 (10.52)

10.5 (14.28)

11 (9.09)

12 (8.33)

cent, 10.5 per cent, and 11 per cent respectively. For NRER

deposits, banks offer one per cent more than the FCNR

deposits for all the periods except for the period of 'two

to three years', where the difference is only half a per

cent. In short it can be said that FCNR deposits command

one per cent more than the domestic deposits, and in case of

NRER deposits it is two per cent margin.

Average Interest Rates (AIRS) on NRgR and PCNR Deposits

The structure of interest rates is presented in

tables 111.9 and 111.10 for the period 1980-89, and it shows

the variation in the interest rates from period to period.

It is observed from the table 111.9 that the AIR for NRER

deposit accounted for 5.77 per cent in the year 1980, and it

increased to 8.16 per cent in the year 1989. This shows a

growth rate of 3.52 per cent in the rate of interest on NRER

deposit during the past decde.

Table 111.10 shows that the AIR on FCNR deposit

was 5.28 per cent in the year 1980, and the same increased

to 7.5 per cent in the year 1989. It is understood from the

table that within a decade the rate of interest on FCNR

deposit has grown at 3.56 per cent.

Table 111.11 studies the inter-relationship of $

FCNR and P FCNR deposits with AIR on it. The 'r' value

0.0364 between $ FCNR deposit and AIR, and 0.6347 between f

FCNR deposit and AIR indicates a positive correlation

between the deposits denominated in both the currencies with

the AIR on FCNR deposit during the study period. The same

is substantiated with positive correlation between FCNR

total deposit and AIR with an 'r' value of 0.1292. Thus, it

can be inferred that FCNR deposits have positive correlation

with the AIRS on FCNR deposits as well as on NRER deposits.

TABLE 111.11

Correlation Co-efficient for Interest Rates and NRI Deposits

Source : Computed results from the compiled data.

Correlation Co-efficient Between

FCNR US $ Deposit and AIR on FCNR Deposit

FCNR f Deposit and AIR on FCNR Deposit

FCNR Total Deposit and AIR on FCNR Deposit

FCNR Total Dcposit and AIR on NRER Deposit

NRER Deposit and AIR on FCNR Deposit

NRER Deposit and AIR on NRER Deposit

Correlation Co-efficient ( 'r' value)

0.0364

0.6347

0.4292

- 0.7435

0.6449

0.8375

But with regard to relationship between the FCNR

deposit and the AIR on NRER deposit, (vide table 111.11) the

correlation is negative as shown by the 'r' value of

-0.7435. But the NRER deposit and AIR on NRER deposit move

in the same direction with computed '"r' value 0.8375

indicating a high degree of positive correlation (vide table

111.11).

TABLE 111.12

Trend of Average Interest Rates on NkW and PCNR Deposits During 1980-89

Average Interest Rate (in per

cent)

i~mwth Rate

Trend Value (Y=a+bx)

't' Value

' $ 1 Value

Type of Account ......................................... NRER Account I FCNR Account

* Significant at 0.05 per cent level of significance. Figures in parentheses denote standard deviations. CV = Co-efficient of Variation.

Tti~~n, i l i n pr,nri tl~nl wtil l~ ttl~rn I.: n n l rnrly:

negative corrclation bctwrcn FCNll dcposit nnd AIR or) NllRll

deposit, the relationship between the NIIEIL deposit and the

AIR on it is highly positive.

Table 111.12 shows the growth of interest rate on

NRER deposit over the past decade. It is understood from

the table that the growth rate ('b' value 0 .3207) is

positive for the interest rate on NRER deposit. The rate of

growth ( ' R ~ , value 0 . 7 9 6 1 ) is found statistically

significant as witnessed by the computed 't' value of 5.59

at 5 per cent level of significance.

The growth rate ('b' value 0.1829) is also found

positive for interest (vide table 111.12) rate on FCNR

deposits with an overall significant growth rate ( ' ~ 2 ' value

0.5268) at 5 per cent level of significance ('t' value

3.0450).

Regression Co-efficient of,.PCNR Deposit and AIRS on NRER and FCNR Deposits

Whether the interest rates on NRER and FCNR

deposits influence the FCNR deposit can be studied by

fitting a multiple linear regression equation. The AIRS on

NRER and FCNR deposits can be considered factors influencing

the total FCNR deposit and the estimates are as follows:

A Total FCNR = - 9935.9 + (1661.1) AIR on NRER + (5.6433)

AIR on FCNR ( 1865.2)

The regression analysis reveals that the FCNR

deposits are found dependent on interest rate with

regression co-efficient of 1661.1 and 5.6433 respectively.

But the overall 'R2' value (0.3387) explains not a very high

degree of relationship between the variables. Therefore, it

can be said that the FCNR deposits are being mobilised by

banks do not depend significantly on the interest rates on

NRER and FCNR deposits.

Regression Co-efficient of NRER Deposit and A I R s on NRER and M I 1 Ucposits

When the influence of interest rates on NRER and

FCNR deposits on total NREH deposits is studied with the

help of multiple linear regression, it is found that NRER

deposits are dependent on the interest rate with regression

co-efficient of 1339.9 and 163.13 respectively. The total

NRER deposit is correlated with AIRS on NRER and FCNR

deposits, and it is found with positive co-efficient of 0.83

and 0.64 respectively. The ' R ~ ' value of 0.7105 does not

reveal a very high degree of influence of interest rates on

the dependent variable, i.e., the NRER deposit. The

computed 't' values for the interest rates on NRER and FCNR

deposits are 2.59 and 0.22 respectively. On the basis of

the analysis, it can be said that the growth of NRER deposit

does not depend much on interest rates on NREll nnd FCNll

deposits.

Regression Co-efficient of Total PCHR Deposit and for $ and f, and AIRS on PCNR and NMR Deposits

In the mobilisation of FCNR deposits, the

implication and interdependent relationship of AERs for $

and f and AIRS on FCNR and NRER deposits are estimated with

the help of a multiple linear regression equation where

Y = Total FCNR deposit

X I = Am for $

XZ = AER for f

X3 = AIR on FCNR deposit

X4 = AIR on NI11[11 deposit

Here, the variable 'Y' is considered as dependent,

and the remaining variables are independent. While there is

a significant strong positive correlation between vnrinbles

'Y' and 'XI', and 'Y' and 'X2' ('r' value 0.84 and 0.87),

the positive correlation of 0.42 and 0.58 is found between

variables 'Y' and 'X3', and 'Y' and 'X4'. The regression

analysis shows the following:

A FCNR = 1.1331 + (3250) AER $ + (-265.32) AER f t

(880.84 ) ( 265.93)

(-2216) AIR on FCNR+(-3577.6) AIR on NRER

( 1154.3) ( 1217)

'R" = 0.9444.

It reveals that the reeression analysis is best

fitted with ' R ~ ' value of 0.94 showing that the association

is good. Further, the growth of FCNR deposits is found

highly dependent on the exchange rates and interest rates

with regression co-efficients of 3250, -265.32, -2216, and

3577.6 for the variables, and it is found statistically

significant (It' value 3.31) for the 'x'' variable. So, it

can be concluded that the FCNR deposits mobilised by banks

in India are highly dependent on the $ exchange rate.

Regression Co-efficient of Total NRER Oeposits and AERs for $, f, and AIRS on FCNR and NRER Deposits

To study the inter-dependence relationship between

the NRER deposit and exchange rates and interest rates, a

multiple linear regression analysis is made considering the

following variables as

Y = NRER deposit

X1 = AER for $

X2 = AER for f

X3 = AIR on FCNR deposit

X4 = AIR on NRER deposit

Here, variable 'Y' is considered as dependent, and

variables 'XI, X2, X3, and X4' are considered as

independent. It is found that there is a strong positive

significant correlation (0.98) between variables 'Y and XI',

whercns, nomewhnt good relntionship (0.83 cnrll) is Iound

between variables 'Y and X2' , and 'Y and X4'. On the other

hand, a positive correlation is found (0.64) between

variables 'Y and X3'.

The regression analysis reveals the following:

Total AER AER A NRER = -3217.4 + (893.76) for + (21.241) for

Deposit $ f (167.2:) ( 45.346)

AIR AIR + (-294.04) on + (-366.61) on

FCNR NRER

It shows that- the regression equation is best

fitted with 'R2' value of 0.99, explaining that the inter-

dependence relationship is good. In addition, the growth of

NRER deposits is found highly dependent on the exchange

rates and interest rates with regression co-efficients of

893.76, 21.24, -294.04, and -366.61, and it is found

statistically significant (computed 't' value is 5.34) for

the 'XI' variable. Therefore, it can be concluded that the

growth of NRER deposits is highly dependent on the $

exchange rate.

Rcgreesion Co-eIficicnt for ToLal NllI UcposiLs (IrCWIl and NUR) and for $ and L, and AIRs on NEER Deposit

To understand better the inter-relationship

between the total NRI deposits and the ,exchange rates, and

intere8t rates, a multjple linear regression analysis is

made considering the variables as

Y = Total (FCNR & NRER) NRI deposits

X1 = AER for $

X2 = AER for S

X3 = AIR on NRER deposit.

Here the variable ' Y ' is considered as dependent,

and the variables 'XI, X2, and X3' are considered as

independent. A strong significant positive correlation

(0.91) is found between the variables 'Y and XI', whereas, a

positive significant correlation is found between variables

'Y and X2'. and ' Y and X3'.

The followine is found from the regression

analysis:

Total AER AER A NRER = -9261.4 + (2387.7) for + (229.19) for

Deposit $ S ( 723.29) (198.56)

AIR + (-2417.2) on

NRER

It shows that the regression equation is fitted

best with 'R" value of 0.95, explaining that the dependence

is good. The growth of total deposits is found highly

dependent on the exchange rates and Qterest rate with

regression co-efficient6 of 2387.7, 229.19 and -2417.2 for

the independent variables, and it is found statistically

significant (computed 't' value is 3.3) for the 'XI'

variable. So, it can be concluded that the growth of NRI

deposits (FCNR and NRER) is highly dependent on the $

exchange rate.

Regression Analysis

PCNR Deposit as Independent and NReR Dcposit as Dcpcndent Variables

To estimate the degree of dependence of NRER

deposit on FCNR deposit,.a simple linear regression equation

is fitted by considering the FCNR deposit as independent

variable, and the NRER deposit as dependent variable. The

results of the regression analysis are presented in table

111.13. It is found from the analysis that the regression,

equation is found best fitted with a higher ' R ~ ' value of

0.82. The growth of NRER deposit with a higher regression

co-efficient of 5.36 is found statistically significant (the

computed 't' value is worked out to 6.04). From the

analysis, it can be concluded that the growth of NRER

deposit is found dependent on the FCNR deposit at a higher

level.

RRER Deposit as Independent and FCWR Deposit as Dependent Variables

To better understand the cause and effect

relationship of the progress of NRI bank deposit (NIIER and

FCNR), a simple regression equation is fitted by considering

the NRER deposit as independent variable and the FCNR

deposit as dependent variable. The regression equation is

found (vide table 111.13) best fitted with an ' R ~ ' value of

more than 0.82. It implies that the relationship is good.

TABLE 111.13

Co-efficient of Regression for G m t h of NRER Deposits on FCNR Deposits as Explanatory

Variable, and Vice Versa, for the Study Period 1980-89

'Significant at 5 per cent level of significance.

Details of Regression

NRER Account Deposit as Dependent on FCNRDeposits

FCNR Account Deposit as Dependent on NRER Deposit

'b' Value

5.3666

1.5281

SE of 'b'

---

8.8876

2.5307

---

It' Value

6.04

6.04

'R2' Value

0.8201

0.8201

Further, the FCNR deposits are found dependent on NRER

deposits with a regression co-efficient of 1.52, and it is

found statistically significant (Computed 't' value 6.04).

Thus, it can be concluded that the growthpf FCNR deposit is

found dependent on the growth of NRER deposits also.

Cost Benefit Analysis of NRI Bank Deposits

The cost and benefits of non-resident deposits to

banks is worked out to find out the profitability of banks

in employing NRI deposits at the prevailing interest rates.

The profitability depends upon several factors such as,

interest cost, interest revenue, servicing cost and

ancillary earnings, etc. Ignoring the servicing cost and

ancillary revenue, the interest differential between cost of

interest and yield on non-resident deposits is calculated

and used in this analysis. However, since interest is

considered as the prime motive for longer flow of funds into

non-resident deposits, it can be assumed that deposits

accepted for longer period, say five years and above, carry

interest at the rate of 12 per cent and 13 per cent per

annum on FCNR and NRER term deposits respectively.

As per the directives of the RBI, Commercial Banks

in India are obliaed to keep a certain percentage of their

total time and demand liabilities as Cash Reserve Ratio

(CRR) and Statutory Liquidity Ratio (SLR).

'l'l~ri c - t l r r r - 1 1 1 v ~ i L i ~ > r,r ('1111 I n :I ))!!I, < . ~ , I I I . w I I I < , I I L H

applicable not only for domestic deposits but also for NRI

deposits. Even in the NRI deposits, there is no difference

between the FCNR and NRER deposits as-far as the CRR is

concerned.

In case of SLR, commercial banks have to maintain

38 per cent on NRER deposit and 25 per cent on FCNR deposit.

After meeting the reserve requirement, 59 per cent of the

NRER deposits and 72 per cent of the FCNR deposits are

available for deployment purposes. Further, the banks

cannot make use of these funds as they like since they have

to follow the RBI directives. According to the RBI

directives, in order to fulfil the social commitments of the

banks towards the society, 40 per cent of the total credit

is to be given to priority sector, preference to food credit

and export credit at concessional rate of interest. This,

in turn affects not oniy the profitability but also the

lending capacity of the banks.

Table 111.14 is self-explanatory, and it is seen

from the table that in the case of NRER deposit, the

interest loss amounts to 1.18 per cent and in the case of

FCNR deposit, the interest gain works out to 0.16 per cent.

In other words, for every additional accretion of Rs.100

crores of NRER deposit a bank will incur a loss of Rs.118

lakhs in a year. However, for an addition of Rs.100 crores

TABLE 111.14

Cost of Yllld on NRI Dsposlts In lndlr

I I I I I I I IYleld I IYIcId I I I Deployment INRER a/c :Rots I IFCNR a/cIRrte I I of Total !per Rs. :(Aver- IlnterestIper CI. IlAver- I Intsrest I 1 Dmposlts I100 : 13 :age for IerrningsI100 = 12:nge for I earnlngs I

11-3 yrs)I 11-3 yr5)1 ' ' ' ' 4 t ~

I CRR I 3.00" - I - I 10.5" 8.5 I 0.64"'I I I

I SLR I 38.00'1 8.5 1 3.23: 25.0'1 8.5 I 2.13 I I

I Lendable I 59.00' I - I - I 64.5' I - I - I I Funds I

I I I a) PrIorItyI 23.60 : 12.0 I 2.83 I 25.80 I 12.0 I 3.10 I I Sector I I I (40 %)"I

I b) Food I 5.31 I 14.0 I 0.74 1 5.81 1 14.0 I 0.81 I 1 Credit I I (DX)'* I

I I C) Export I 3.64 I 12.0 I 0.46 I 4.19 I 12.0 I 0.50 I I Credlt I I I I (6.5X)*'I I

I d ) Other I 2.36 I 16.0 I 0.38 I 2.58 I 16.0 I 0.41 'l I Pub.Sec. I I I 1 Companies I (4 x)" 'l

I I e)Othsrl I 23.88 I 17.5 I 4.18 I 26.121 17.5 I 4.57 I I (40.58)"I

' ' * ' ( b - I ITotalEarnIngs - I - I 11.821 - I - I 12.16 I I

' s a ' l ' t

I(Lass) Total I - I - ! 13.00 1 - I - I 12.00 1 ICaat I I I

IForsgoInp I - I - I(-)1.18 I - I - I 0 1 I ILosslGaIn 1 I

t Parcentr#ed on Total D~posit I* Psrcmntage on Iendabla funds

raw Interest errnlnls are p~ruisnlble only when the CRR Is more than 3 per cent.

of FCNR deposits, the interest gain to a bank would be Rs.16

lakhs per year. This loss (on NRER deposit) is on account

of interest cost alone. If servicing cost in terms of

manpower and other supporting servicw are taken into

account, the loss would be more in case of NRER deposit. In

the case of FCNR deposit, even the meagre amount of gain

will vanish, and it may also draw banks to incur heavy loss.

Of course, banks would have some earnings by way of

commission on inward remittances, exchange profits on

conversion of foreign exchange, etc., but these will not be

so substantial as to offset the increased cost.