Whalesbook
NRI Deposits Show Sharp Decline
Foreign currency deposits from Non-Resident Indians (NRIs) in Indian banks have dropped significantly. Data from the Reserve Bank of India (RBI) shows that NRI deposit inflows for April-February of fiscal year 2025-26 fell by 24.17% to $11.04 billion. The sharpest decline was in Foreign Currency Non-Resident (FCNR-B) deposits, which plunged by nearly 86% to $0.91 billion. These accounts are designed to protect NRI funds from currency swings by holding them in foreign currencies, but this protection appears less appealing to investors now.
New Inflows Slow Despite Held Balances
Despite the lower new deposits, the total amount of outstanding NRI deposits grew to $167.58 billion by the end of February 2026, up from $160.34 billion a year earlier. FCNR-B outstanding balances also saw a modest increase to $33.72 billion. This shows that while existing funds are largely staying put, the interest in making new investments in these accounts has decreased. This situation, combined with the Indian rupee's 10% depreciation during FY26, presents challenges for India's foreign exchange reserves and its overall liquidity management.
Global Rates and Rupee Weakness Drive Changes
NRI investors are reassessing their deposit strategies due to global economic shifts. Higher interest rates in developed countries like the United States are making foreign fixed-income products more competitive, offering comparable or better returns without the currency risk tied to rupee-denominated assets. While Indian banks offer attractive rates, global alternatives are increasingly drawing investor attention. The rupee's depreciation, influenced by rising oil prices, geopolitical tensions, and capital outflows, complicates investment decisions for NRIs. Even FCNR-B deposits may not fully compensate for potential gains elsewhere or the long-term impact of a weaker rupee on purchasing power when funds are eventually repatriated.
Risks to Liquidity and Forex Reserves
The slowdown in NRI deposits, especially FCNR-B, poses a risk to India's banking liquidity and foreign exchange reserves. Experts note that FCNR-B accounts are primarily a crisis management tool, and their current decline suggests investor caution. India holds substantial foreign exchange reserves, but usable reserves for currency intervention might be lower after accounting for forward commitments. Banking sector liquidity is already under pressure as loan growth outpaces deposit growth, pushing banks to offer higher rates on other deposit types. Compared to other NRI investment options like corporate bonds (offering 8-14% returns) or potential equity market gains, fixed Indian deposits may appear less attractive given currency risk and opportunity costs.
Outlook: Policy Shifts and External Factors
Some market participants suggest policymakers should revive special NRI deposit schemes and offer tax incentives to attract foreign currency inflows and ease liquidity. While the RBI prefers long-term reforms, the sustained drop in NRI deposits, particularly FCNR-B accounts, might lead to a policy review. The RBI's actions to manage rupee volatility have also tightened domestic liquidity. The future of NRI deposits will likely depend on global interest rate trends, rupee stability, and the effectiveness of India's economic policies in attracting sustainable capital. Analysts warn that ongoing geopolitical risks could further weaken the rupee, possibly requiring stronger central bank actions to attract foreign currency.