“Advisers find it hard to convince investors that the Indian markets still hold hope, more than the US or European markets in view of an impending recession and political instability elsewhere.
“Most investors adopt a wait-and-watch attitude that put advisers in a fix and business is at a standstill. In fact, we find it hard to retain many,” said Manoj Vallikudiyil, partner Manjul Associates, securities and investment consultants.
This is in the wake of reports that NRI deposits in Indian banks are expected to dwindle with further reduction in deposit rates following the central bank slashing repo rate in its policy review meeting last week.
As banks have linked their floating lending rates for retail and micro and small enterprise segments to the repo rate, the cut may also lead to a further reduction in deposit rates.
Rate cut and after
The Reserve Bank of India cut its repo rate – the rate at which banks borrow from it – by 25 basis points (0.25%) last week, the fifth time in a row, bringing the policy rate down by 135 basis points in the past eight months.
NRIs hold term deposits in Indian banks – either rupee-denominated or USD-denominated – under non-resident external accounts.
The interest rate on NRI rupee deposits have seen a reduction by 0.8-1% in the past one year to 6.5-6.6%, and the interest rate on US dollar-denominated deposits by expat Indians in Indian banks have seen a cut of about 0.60% in the past six months to 2.55%.
Indications are that State Bank of India, India’s largest commercial bank, which accounts for the bulk of NRI deposits, may review the interest rate on NRI deposits shortly. All other banks will follow suit. This will affect many NRI depositors as Gulf-based NRIs account for a major part of deposits in Indian banks.
“As NRIs do not have many options to channel their savings, they will continue to opt for bank deposits in spite of the falling interest rates, the negative outlook of the stock markets and real estate investments,” said Binoo Nayyar, chief financial officer, TrendRiser Securities, Dubai.
Further, the rates offered by Indian banks on dollar deposits in NRE accounts are higher than what is offered on bank deposits in the US, Europe or the UK.
Mutual funds option
The continuing uncertainty on the stock market is a deterrent, though mutual funds are the best option for NRI investors.
UAE-based investors pumped $2.1bn (£1.71bn; €1.91bn) in equity investments through mutual funds in FY 2018-19. They are the largest non-resident investor group in Indian mutual funds, according to the Reserve Bank of India data.
Expatriate Indians form the bulk of non-resident investors in the UAE who invest in Indian mutual funds.
The RBI data said that UAE-based investors accounted for 16% of the total $13.08 bn (£10.66bn; €11.90bn) non-resident investments in Indian mutual funds by the end of March 2019.
Cumulatively, investors from the UAE, UK and US accounted for one-third of the units held by NRIs in Indian mutual funds. The total inflow into Indian mutual funds by March this year was up 9% year-on-year from March 2018.
Returns of most of the portfolios by Indian mutual funds, however, have seen significant fall in the net asset values (NAV) of their units in the recent months, with the Indian market currently going through upheaval due to sluggish economic growth conditions in the country and bleak global factors, partly due to ongoing India-US trade tensions.