Whalesbook
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The Shifting NRI Deposit Landscape
The performance of Non-Resident Indian (NRI) deposit schemes presents a narrative of reallocation rather than outright divestment. During the April–December 2025 period, overall inflows contracted by 15.97% to $11.20 billion, a notable decrease from $13.33 billion in the corresponding period of 2024. This decline was predominantly steered by a dramatic slump in Foreign Currency Non-Resident (FCNR) deposits, specifically FCNR(B) accounts. These accounts, designed to hedge against currency fluctuations by holding funds in foreign currencies, saw inflows plummet to $2.04 billion, a sharp fall from $6.46 billion in the prior year. Despite this reduction in new flows, the outstanding balance in FCNR(B) accounts remained substantial at $34.85 billion by December 2025.
Factors Driving FCNR(B) Contraction
The sharp decline in FCNR(B) inflows can be attributed to several factors, including shifts in global and domestic interest rate differentials, and evolving currency expectations. In early December 2024, the Reserve Bank of India (RBI) had raised interest rate ceilings on FCNR(B) deposits to attract more foreign capital and support the rupee. However, the data for April-December 2025 indicates that even these higher rates may not have been sufficient to counteract other emerging opportunities or risk perceptions. While FCNR(B) deposits are shielded from currency fluctuations, the rupee's trajectory plays a crucial role in overall NRI sentiment. Bank of America projected the rupee to strengthen to 86 per US dollar by the end of 2026, suggesting potential for appreciation that would favour rupee-denominated assets. Furthermore, the Indian equity market, despite underperforming global peers in 2025 with modest single-digit gains, continued to offer potentially higher long-term returns than fixed-income instruments. The attractiveness of fixed deposits, including FDs in NRE and NRO accounts, is also highlighted, with yields around 7-9% historically.
Resilience in Rupee-Denominated Instruments
In contrast to the slump in FCNR(B) deposits, both Non-Resident External (NRE) and Non-Resident Ordinary (NRO) accounts demonstrated notable resilience. NRE deposits attracted $5.06 billion in inflows during April–December 2025, a significant increase from $3.57 billion in the corresponding period of 2024. Similarly, NRO deposits saw inflows of $4.10 billion, up from $3.29 billion a year prior. These rupee-denominated accounts, particularly NRE accounts offering full repatriability and tax exemptions on interest and principal, serve as key channels for NRIs to manage their earnings and send money to India. The continued inflow into these accounts suggests a sustained confidence in the Indian economy and a preference for rupee-based investments, possibly due to perceived higher yields or strategic diversification away from foreign currency holdings. Total outstanding NRI deposits increased to $169.27 billion by December 2025, up from $161.80 billion in December 2024, underscoring this reallocation trend where overall holdings expanded despite reduced foreign currency deposit inflows.
The Hedge Fund View (Bear Case)
While the growth in NRE and NRO deposits offers a buffer, the sharp contraction in FCNR(B) inflows warrants caution. A significant fall in foreign currency deposits could indicate a broader risk-off sentiment among NRIs, or a proactive shift towards higher-yielding, albeit potentially riskier, assets like equities or real estate. The Indian equity market, while volatile, saw modest gains in 2025, with PSU banks and metals being outperformers. However, the overall Indian equity market lagged global peers, with foreign investors pulling out billions in dollar terms, suggesting potential global capital flight concerns. If the current trend of reduced FCNR(B) inflows persists, it could signal a decrease in the appetite for safe, currency-hedged assets, potentially indicating less confidence in the stability of foreign currencies or a less attractive interest rate environment abroad compared to rupee assets. Furthermore, outward remittances for international travel and investments saw a modest annual growth in April 2025, with outflows for equity and debt investments more than doubling year-on-year, suggesting that capital might be actively moving out of fixed deposit instruments towards more dynamic investment avenues.
Future Outlook
Looking ahead, the trajectory of NRI deposits will likely depend on the interplay of global interest rates, the Indian rupee's performance, and domestic economic policies. While some forecasts suggest a strengthening rupee to around 86 per US dollar by end-2026, other analyses point to near-term pressures and a difficult road to sustained recovery for the INR. The RBI's proactive stance on interest rate adjustments, as seen with the December 2024 hike in FCNR(B) ceilings, indicates a willingness to adapt to attract capital. However, with a growing interest in alternative investment avenues like real estate, where NRIs contributed 17% of overall primary sales in India in 2025, the traditional deposit schemes may face continued competition for NRI capital.