## _wp0448

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---

### Motivation and introduction
- Since the 1980s, nonresident Indians (NRIs) have placed large amounts of funds on deposit with the Indian banking system.
- In November 2003, NRI deposits totaled US$32.5 billion, about one-sixth of the size of deposits of residents with commercial banks.
- Most NRI deposits are repatriable; in mid-2003, once account is taken of two foreign-currency bonds issued exclusively to NRIs—the Resurgent India Bond (RIB) in 1998, and the India Millennium Deposit (IMD) in 2000—NRIs held 60 percent of India’s external debt that was owed to private creditors.
- The RIB was repaid upon maturity in August 2003.

### Historical policy framework and vulnerabilities
- 1980s: NRI deposit taking accelerated alongside increased migration of Indians to work overseas, particularly in the Gulf countries.
- Government schemes made deposits fully repatriable and offered attractive interest rates; deposits were subject to concessionary reserve ratios and liquidity requirements.
- The Reserve Bank of India (RBI) assumed exchange rate risk on foreign currency–denominated accounts under earlier schemes.
- Vulnerability manifested during the 1991 balance of payments crisis, when outflows of deposits compounded pressure on external accounts.
- Post‑1991 policy responses included:
  - Shifting composition toward rupee‑denominated accounts.
  - Reducing the repatriable component.
  - Shifting exchange risk on foreign currency deposits back to the banks.

### Later developments and regulatory changes (1990s–2003)
- Rapid growth in information technology exports and inward foreign investment improved India’s foreign reserve position in the subsequent decade.
- Authorities’ measures included:
  - Linking interest rates on NRI foreign currency deposits more closely to the London interbank offered rate (LIBOR).
  - Giving banks flexibility to set interest rates on rupee deposits.
  - From April 2002, making all new deposits fully repatriable.
- Specific regulatory milestones:
  - February 1970: NR(E)RA introduced (rupee‑denominated, repatriable).
  - November 1975: FCNRA introduced (foreign currency, repatriable; RBI assumed exchange rate risk).
  - June 1992: NR(NR)D introduced (nonrepatriable rupee‑denominated).
  - May 1993: FCNRB introduced (repatriable foreign currency, banks bear exchange rate risk).
  - August 1994: FCNRA closed to new deposits; by 1997 remaining balances repaid.
  - April 2002: NRNR scheme discontinued for fresh deposits; overdue NRNR not to be renewed.
  - July 2003, September 2003, October 2003: ceilings on interest rates on NRE deposits fixed at 250 bps, 100 bps, and 25 bps above LIBOR, respectively.
- Interest rate liberalization timeline (selected):
  - May 1994: maximum interest rate on rupee deposits reduced to 10 percent.
  - October 1994: maximum reduced to 8 percent.
  - October 1995: maximum increased to 12 percent.
  - April 1996: interest rates on term deposits ≥ two years freed.
  - April 1997: interest rates on term deposits ≥ one year freed; FCNR(B) rates permitted subject to ceilings.
  - September 1997: interest rates on deposits of all maturity freed.
  - October 1997: FCNR(B) deposits to be offered at LIBOR of relevant currency and maturity.
  - April 1998: FCNR(B) maturities ≥ one year at 50 basis points above LIBOR; shorter maturities at 25 basis points below LIBOR.
  - October 1999: minimum maturity of foreign currency deposits raised from six months to one year.
  - April 2002: FCNR(B) 1–3 year maturities to be offered at LIBOR/swap rates for respective maturities minus 25 basis points.

### Trends in NRI deposit flows — Pre‑crisis and Post‑crisis
- Pre‑crisis (1970–1990s):
  - February 1970: NRE introduced (repatriable rupee‑denominated).
  - November 1975: FCNRA introduced.
  - By March 1980:
    - NRE deposits = US$850 million
    - FCNRA balances < US$200 million
  - 1980s: accelerated inflows; FCNRA grew rapidly.
  - By March 1990:
    - Stock of NRI deposits = US$12.4 billion
    - 70 percent of NRI deposits were foreign‑currency denominated
- Post‑crisis:
  - Balance of payments crisis early 1990s associated with outflow: NRERA and FCNRA outstanding fell by US$904 million during fiscal year 1991–92.
  - About three‑quarters of deposits then had maturities > one year but premature encashment (with penalty) created put‑option like features.
  - RBI sustained large losses on exchange rate guarantee as rupee depreciated.
  - 1990s outcomes:
    - FCNRB inflows almost offset FCNRA repayments.
    - Net inflows under rupee schemes during the decade = US$10 billion.
    - Recent years: average inflows exceeded US$2 billion per annum.
    - Foreign reserves grew rapidly.
    - April 2002: NRNR scheme discontinued; all new NRI deposits made fully repatriable.
  - Short‑term surge:
    - April 2003–November 2003 net inflows ≈ US$4 billion (note: significant portion recycled from maturing RIBs).

### Properties of NRI deposits and event effects
- Currency composition:
  - Foreign currency share fell from 70 percent in 1990 to 32 percent in August 2003.
  - Net inflow of foreign‑currency deposits since 1994 has been negligible (sample period considered in Section III).
- Repatriable component:
  - Declined from 100 percent in March 1990 to 69 percent by March 2000.
  - After NRNR discontinuation in April 2002, repatriable component rose to 91 percent by August 2003; will eventually reach 100 percent as outstanding NRNR mature.
- Stability and volatility:
  - Monthly inflows of rupee deposits, foreign currency deposits, and foreign portfolio investment into India (FII flows) have similar standard deviations.
  - Post‑1994 foreign currency deposits series has a very small mean and thus a much higher coefficient of variation than rupee deposits or FII equity flows.
- Seasonality:
  - NRI deposit flows higher at the beginning of the year than at the end; inflows strongest in March and April.
- Effects of alternative bond schemes:
  - Resurgent India Bond (RIB), August 1998: raised US$4.2 billion; paid 7¾ percent on U.S. dollar deposits; targeted NRIs.
  - Indian Millennium Deposit (IMD), October–November 2000: raised US$5.5 billion; paid 8½ percent on U.S. dollar deposits.
  - RIB associated with a US$600 million fall in foreign currency deposits during issuance month; negative monthly flows occurred at times of both bond issues.

### Data and methodology (Section III)
- Data coverage:
  - Monthly foreign currency deposit data: April 1980–March 1991 and March 1994–November 2003.
  - Monthly rupee deposit data: April 1980–November 2003.
  - Main econometric analysis restricted to March 1994–December 2002 due to limited availability of some explanatory variables.
- Dependent variables estimated (four series):
  - FCDEP = FCNRA + FCNRB
  - REDEP = NRE + NRNR
  - NRE = repatriable rupee deposits
  - TOTDEP = FCDEP + REDEP
- Key explanatory variables and constructs:
  - Interest variables: month‑on‑month changes and differentials vis‑à‑vis LIBOR (e.g., DOLINTC, LIBORC, NREINTC).
  - Exchange rate change lagged one month (LEXCC) to capture expected rupee path and mitigate endogeneity.
  - Non‑interest variables: sovereign rating downgrades (RATING), government resignation (GOVT), geopolitical events (GEOPOLT), Asian crisis dummy (ASIA), crises outside Asia dummy, stock returns (DOWC, BSE), oil‑shock dummy (OIL10 for >10 percent month‑on‑month oil price increase), bond issue dummies (DUMRIB, DUMIMD), seasonality dummies (Time1, Time2), and DUMNRNR for NRNR discontinuation.
- Econometric considerations:
  - Augmented Dickey‑Fuller and Phillips‑Perron tests: most series are I(0) — unit root hypothesis rejected.
  - Addressed simultaneity of reserves by using instruments such as sovereign ratings and political/geopolitical dummies.
  - Interest series often correlated; differences used to mitigate multicollinearity.

### Key empirical findings (econometric results, Section IV)
- Estimation approach:
  - General specification estimated then reduced to parsimonious regressors; baseline results reported with sensitivity analyses.
- Interest-rate effects:
  - Positive association between NRI deposit flows and change in differential between NRI deposit rates and LIBOR.
  - Coefficient on interest rate differential more significant for rupee deposits than for foreign currency deposits.
  - DUMRIB coefficient negative and significant at the 1 percent level in foreign currency and total deposit regressions (evidence of diversion into high‑yield RIB).
  - DUMIMD coefficients generally negative but insignificant; both RIB and IMD dummies insignificant in rupee deposit regressions.
  - Direct deposit interest rate variables suffer multicollinearity with LIBOR; generally right‑signed but not significant.
  - CRR differential coefficient negative but not significant.
- Non‑interest determinants:
  - Domestic political uncertainty (GOVT) associated with reduced inflows of foreign currency deposits in some specifications (significant at 10 or 15 percent); mostly insignificant for rupee deposits.
  - Geopolitical risk (GEOPOLT) negatively and significantly associated with rupee deposit flows (significant at 5 percent or higher); GEOPOLT positive and significant in NRE regressions at 10 or 5 percent, implying shifts from nonrepatriable to repatriable rupee deposits during geopolitical uncertainty.
  - Asian crisis (ASIA) has negative and significant coefficients for both foreign currency and rupee deposits; crises outside Asia insignificant.
  - Exchange rate depreciation negatively associated with rupee deposit flows in bivariate tests but not significant in multivariate regressions.
  - Sovereign ratings downgrades do not discourage NRI deposits: RATING positive and marginally significant in foreign currency equation, negative but insignificant in rupee equations.
  - Oil price shocks matter for foreign currency deposits but not for rupee deposits.
  - Stock market returns generally not important; BSE return positive for foreign currency deposits but not significant for rupee deposits; DOWC not significant.
  - DUMNRNR has a positive and highly significant coefficient in the NRE deposit equation.
  - Seasonality confirmed: higher deposits in first four months of year.
- Structural stability:
  - Chow Test for structural break post‑September 11, 2001: accept null of no structural break; caveat of few observations since September 11, 2001.

### Conclusions and policy implications (Section V)
- Historical role:
  - NRI deposits were important in financing India’s current account deficits pre‑1991 crisis and gained popularity in the 1980s.
  - Post‑1991 modifications biased schemes toward nonrepatriable and rupee‑denominated inflows; dollar‑denominated deposits rose little in the 1990s while rupee schemes grew rapidly.
- Stability assessment:
  - Over the past decade, NRI deposits exhibited considerable stability; standard deviations low and comparable to portfolio equity inflows.
  - Occasional negative flows coincided with adverse domestic or external events but tended to be short lived.
- Main takeaways:
  - NRI deposit flows respond positively to increases in the interest rate differential between NRI deposits and LIBOR.
  - Deposit flows are vulnerable to domestic uncertainties (government instability, geopolitical tensions) and external events (Asian crisis).
  - NRIs substitute away from NRI deposits toward higher‑yield schemes (e.g., RIB).
- Policy implication:
  - NRI deposits are a substantial and relatively stable source of foreign exchange but remain sensitive to standard risk‑and‑return factors — underscoring the importance of maintaining stable economic conditions and a sound policy stance.
- Suggested avenues for future research:
  - Study geographical composition of deposits to better understand external shocks affecting inflows.
  - Joint analysis of NRI bank deposits and remittances, as they likely share common determinants.

### Box 1 — Regulations Governing NRI Deposits (chronology and rules)
- Chronology (selected milestones):
  - February 1970: NR(E)RA introduced (repatriation of both principal and interest).
  - November 1975: FCNRA introduced (foreign currency, repatriable; RBI assumed exchange rate risk).
  - November 1990: FC(B&O)D introduced (nonrepatriable; terminated July 1993).
  - June 1991: FCON introduced (principal not repatriable).
  - June 1992: NR(NR)D introduced (nonrepatriable rupee‑denominated).
  - May 1993: FCNRB introduced (banks bear exchange rate risk).
  - August 1994: FCNRA closed to new deposits; by 1997 all remaining balances repaid.
  - April 2002: No fresh NRNR accepted; overdue NRNR not to be renewed; options to credit to NRE accounts or repatriate maturity proceeds outside India.
  - July 2003, September 2003, October 2003: progressive tightening of NRE interest rate ceilings to 250 bps, 100 bps, and 25 bps above LIBOR.
- Scheme‑specific rules (summary):
  - NR(E)RA: rupee‑denominated, repatriation of both principal and interest permitted.
  - FCNRA: foreign currency denominated, repatriable; RBI originally assumed exchange rate risk; closed to new deposits in August 1994.
  - FC(B&O)D: nonrepatriable, open to both foreigners and NRIs (terminated July 1993).
  - FCON: foreign currency scheme where principal was not repatriable.
  - NR(NR)D: nonrepatriable rupee‑denominated; banks allowed to fix interest rates.
  - FCNRB: repatriable foreign currency scheme where banks bear exchange rate risk.
- Recent interventions (2002–2003):
  - April 2002: discontinuation of accepting fresh NRNR deposits; overdue NRNR deposits not to be renewed.
  - April 2002: FCNR(B) pricing for 1–3 year maturities specified as LIBOR/swap rates for respective maturities minus 25 basis points.
  - July 2003, September 2003, October 2003: ceilings on interest rates on NRE deposits set at 250 bps, 100 bps, and 25 bps above LIBOR, respectively.

*Source: _wp0448*

### References..............................................................................................................

### _wp0448 - References

### Motivation and introduction
- Since the 1980s, nonresident Indians (NRIs) have placed large amounts of funds on deposit with the Indian banking system.
- In November 2003, NRI deposits totaled US$32.5 billion, which is about one-sixth of the size of deposits of residents with commercial banks.
- Most NRI deposits are repatriable; in mid-2003, once account is taken of two foreign-currency bonds issued exclusively to NRIs—the Resurgent India Bond (RIB) in 1998, and the India Millennium Deposit (IMD) in 2000—NRIs held 60 percent of India’s external debt that was owed to private creditors.
- The RIB was repaid upon maturity in August 2003.

### Historical policy framework and vulnerabilities
- NRI deposit taking accelerated in the 1980s alongside increased migration of Indians to work overseas, particularly in the Gulf countries.
- Government schemes made deposits fully repatriable and offered attractive interest rates; deposits were subject to concessionary reserve ratios and liquidity requirements.
- The Reserve Bank of India (RBI) assumed exchange rate risk on foreign currency–denominated accounts under earlier schemes.
- Vulnerability manifested during the 1991 balance of payments crisis, when outflows of deposits compounded pressure on external accounts (Acharya, 2001).
- Post-1991 policy responses included:
  - Shifting composition toward rupee-denominated accounts.
  - Reducing the repatriable component (RBI, 2000).
  - Shifting exchange risk on foreign currency deposits back to the banks.

### Later developments and regulatory changes
- Over the subsequent decade, rapid growth in information technology exports and inward foreign investment improved India’s foreign reserve position.
- Authorities responded by:
  - Linking interest rates on NRI foreign currency deposits more closely to the London interbank offered rate (LIBOR).
  - Giving banks flexibility to set interest rates on rupee deposits.
  - From April 2002, making all new deposits fully repatriable.

### Key empirical findings on stability and determinants
- Monthly deposit flows have been quite stable since the 1991 crisis, with standard deviations comparable to portfolio equity inflows into India.
- Nevertheless, there have been occasions when monthly flows of deposits have turned negative; such incidents coincided with clearly identifiable adverse domestic or external events, but effects tended to be short lived.
- Econometric analysis in an ordinary-least-squares (OLS) framework shows:
  - Interest rate changes on NRI deposits and LIBOR are determinants of deposit inflows, implying generally higher Indian interest rates have supported NRI deposits.
  - Evidence of withdrawals from foreign currency deposits at the time of the two extraordinary bond issues—the RIB and the IMD—both of which offered high interest rates, supporting interest-sensitivity of NRI deposits.
  - Deposits are affected by political and geopolitical uncertainties (for example, government resigning in mid-term or tensions on India’s borders).
  - Deposits appear vulnerable to contagion from regional turbulence, such as during the Asian crisis.

### Paper organization (as presented)
- Section II discusses trends in NRI deposits.
- Section III describes the data and methodology used in the econometric exercise.

*Source: _wp0448 - References*

### Section IV presents the econometric results. Section V concludes.

### _wp0448 - Section IV presents the econometric results. Section V concludes.

### Trends in Nonresident Indian (NRI) Deposit Flows — Pre‑Crisis
- NRI deposits introduced in February 1970: Nonresident (External) Rupee Account (NRE) — rupee‑denominated, repatriable principal and interest.
- November 1975: Foreign Currency Nonresident Account (FCNRA) introduced — foreign currency denominated, repatriable; RBI assumed exchange rate risk.
- By March 1980:
  - NRE deposits = US$850 million
  - FCNRA balances < US$200 million
- 1980s: accelerated inflows into NRI deposits; FCNRA grew particularly fast, coinciding with a widening current account deficit and increased commercial borrowing.
- By March 1990:
  - Stock of NRI deposits = US$12.4 billion
  - 70 percent of NRI deposits were foreign‑currency denominated
- Drivers of foreign‑currency preference: favorable interest rates, lack of exchange rate risk (RBI guaranteed), lower CRR and SLR on NRI deposits than on resident deposits.
- Early 1980s takeoff in NRI deposits coincided with reductions in CRRs applicable to these accounts.

### Trends in NRI Deposit Flows — Post‑Crisis
- Balance of payments crisis early 1990s associated with outflow:
  - NRERA and FCNRA outstanding fell by US$904 million during fiscal year 1991–92.
- Vulnerabilities revealed by crisis:
  - Deposits fully repatriable and thus free to leave on maturity.
  - About three‑quarters of deposits then had maturities > one year, but premature encashment (with penalty) created put‑option like features and potential short‑term pressures.
  - RBI sustained large losses on exchange rate guarantee as rupee depreciated.
- Policy changes after crisis:
  - June 1992: Nonresident Nonrepatriable (NRNR) account introduced — repatriation of interest income only; exempted from SLR and CRR.
  - May 1993: FCNRB introduced — foreign‑currency repatriable deposit but banks bear exchange rate risk.
  - August 1994: FCNRA closed to new deposits; by 1997 remaining balances repaid.
- 1990s outcomes:
  - FCNRB inflows almost offset FCNRA repayments.
  - Net inflows under rupee schemes during the decade = US$10 billion.
  - Recent years: average inflows exceeded US$2 billion per annum.
  - Foreign reserves grew rapidly.
  - Policy moves to reduce interest rates on NRI deposits and subject them to same CRR and SLR as resident deposits.
  - April 2002: NRNR scheme discontinued; all new NRI deposits made fully repatriable.
- Short‑term surge:
  - April 2003–November 2003 net inflows ≈ US$4 billion (note: significant portion recycled from maturing RIBs).

### Properties of NRI Deposits
- Currency composition:
  - Foreign currency share fell from 70 percent in 1990 to 32 percent in August 2003.
  - Net inflow of foreign‑currency deposits since 1994 has been negligible (sample period considered in Section III).
- Repatriable component:
  - Declined from 100 percent in March 1990 to 69 percent by March 2000.
  - After NRNR discontinuation in April 2002, repatriable component rose to 91 percent by August 2003; will eventually reach 100 percent as outstanding NRNR mature.
- Stability:
  - In standard deviation terms, monthly inflows of rupee deposits, foreign currency deposits, and foreign portfolio investment into India (FII flows) have similar volatility.
  - Post‑1994 foreign currency deposits series has a very small mean and thus a much higher coefficient of variation than rupee deposits or FII equity flows.
- Effects of economic and political events:
  - Selected events analyzed: government resigning midterm, border tensions with Pakistan, credit rating downgrades, the Asian crisis, substantial oil price increases.
  - Net monthly deposit inflows are affected by these events, but magnitudes and durations appear small.
- Seasonality:
  - NRI deposit flows higher at the beginning of the year than at the end.
  - Regressions with Time1 (January–April) and Time2 (September–December) dummies show a significant beginning‑of‑year effect; inflows strongest in March and April.
- Effects of alternative bond schemes:
  - Resurgent India Bond (RIB), August 1998: raised US$4.2 billion; paid 7¾ percent on U.S. dollar deposits; targeted NRIs.
  - Indian Millennium Deposit (IMD), October–November 2000: raised US$5.5 billion; paid 8½ percent on U.S. dollar deposits.
  - Negative monthly flows of NRI deposits occurred at times of both bond issues; RIB associated with a US$600 million fall in foreign currency deposits during issuance month.

### Data and Methodology (Section III)
- Data availability:
  - Monthly foreign currency deposit data consistently available: April 1980–March 1991 and March 1994–November 2003.
  - Monthly rupee deposit data available: April 1980–November 2003.
  - Analysis restricted to March 1994–December 2002 due to limited availability of some explanatory variables.
- Contribution relative to prior work:
  - Builds on Mohanty, Kapur and Sahoo (2000) with a more comprehensive set of determinants and slightly longer period.
  - Addresses simultaneity concerns with reserves by using instruments such as sovereign ratings and political/geopolitical dummies.
- Regression framework:
  - Dependent variable: net monthly inflow of deposits measured in U.S. dollars.
  - Four separate dependent series estimated: FCDEP (FCNRA + FCNRB), REDEP (NRE + NRNR), NRE (repatriable rupee deposits), TOTDEP (FCDEP + REDEP).
  - Interest variables include month‑on‑month changes and differentials vis‑à‑vis LIBOR (e.g., DOLINTC, LIBORC, NREINTC); exchange rate change lagged one month (LEXCC) to capture expected rupee path and mitigate endogeneity.
  - Non‑interest variables include sovereign rating downgrades (RATING), government resignation (GOVT), geopolitical events (GEOPOLT), Asian crisis dummy (ASIA), crises outside Asia dummy, stock returns (DOWC, BSE), oil‑shock dummy (OIL10 for >10 percent month‑on‑month oil price increase), bond issue dummies (DUMRIB, DUMIMD), seasonality dummies (Time1, Time2), and DUMNRNR for NRNR discontinuation.
- Unit root tests:
  - Augmented Dickey‑Fuller and Phillips‑Perron tests applied; most series are in percentage terms and found to be I(0) — unit root hypothesis rejected.
- Correlation findings:
  - Interest series often correlated with each other; differences used to mitigate multicollinearity.
  - Foreign‑currency deposit flows negatively correlated with ASIA and DUMRIB; positively associated with domestic stock returns (BSE).
  - Rupee deposit flows negatively associated with LIBORC (and hence DOLINTC), exchange rate depreciation, ASIA, and geopolitical risks.
  - Total NRI deposit flows negatively associated with LIBORC (and DOLINTC), ASIA, domestic political and geopolitical uncertainty, issuance of RIB; positively associated with BSE return.

### Econometric Results (Section IV)
- Estimation approach:
  - General specification estimated then reduced to parsimonious regressors; baseline results in Column I of Tables 6–9 with sensitivity analyses in other columns.
- Interest variables:
  - Positive association between NRI deposit flows and change in differential between NRI deposit rates and LIBOR.
  - Coefficient on interest rate differential more significant for rupee deposits than for foreign currency deposits (foreign currency deposit rates often very similar to LIBOR).
  - DUMRIB coefficient negative and significant at the 1 percent level in foreign currency and total deposit regressions (evidence of diversion into high‑yield RIB).
  - DUMIMD coefficients generally negative but insignificant; both dummies insignificant in rupee deposit regressions.
  - Direct deposit interest rate variables suffer multicollinearity with LIBOR; right‑signed but not significant.
  - CRR differential coefficient negative but not significant (concessionary CRRs not a major explanatory factor in these regressions).
- Non‑interest variables:
  - Domestic political uncertainty (GOVT) associated with reduced inflows of foreign currency deposits in some specifications (significant at 10 or 15 percent); mostly insignificant for rupee deposits.
  - Geopolitical risk (GEOPOLT) negatively and significantly associated with rupee deposit flows (significant at 5 percent or higher); in NRE deposit regressions GEOPOLT coefficient positive and significant at 10 or 5 percent, implying shifts from nonrepatriable to repatriable rupee deposits during geopolitical uncertainty.
  - Asian crisis (ASIA) has negative and significant coefficients for both foreign currency and rupee deposits; crises outside Asia insignificant.
  - Rupee deposit flows negatively associated with exchange rate depreciation in bivariate tests but not significant in multivariate regressions, possibly due to collinearity with ASIA and domestic political variables.
  - Sovereign ratings downgrades do not discourage NRI deposits: RATING positive and marginally significant in foreign currency equation, negative but insignificant in rupee equations — consistent with NRIs being less influenced by formal sovereign risk signals than institutional investors.
  - Large oil price swings matter for foreign currency deposits (oil‑shock effects) but not for rupee deposits.
  - Stock market returns generally not important; BSE return positive for foreign currency deposits but not significant for rupee deposits; DOWC not significant.
  - DUMNRNR has a positive and highly significant coefficient in the NRE deposit equation.
  - Seasonality confirmed: higher deposits in first four months of year.
- Structural stability:
  - Chow Test for structural break post-September 11, 2001: accept null of no structural break; caveat of few observations since September 2001.

### Conclusions and Suggestions for Future Work (Section V)
- Historical summary:
  - NRI deposits gained popularity in the 1980s and were important in financing India’s current account deficits pre‑1991 crisis.
  - Post‑1991 modifications biased schemes toward nonrepatriable and rupee‑denominated inflows; dollar‑denominated deposits rose little in the 1990s while rupee schemes grew rapidly.
- Stability and volatility:
  - Over the past decade, NRI deposits exhibited considerable stability; standard deviations low and comparable to portfolio equity inflows.
  - Occasional negative flows coincided with adverse domestic or external events but tended to be short lived.
- Key econometric findings:
  - NRI deposit flows respond positively to increases in the interest rate differential between NRI deposits and LIBOR.
  - Deposit flows are vulnerable to domestic uncertainties (government instability, geopolitical tensions) and external events (Asian crisis).
  - NRIs substitute away from NRI deposits toward schemes offering higher interest rates (e.g., RIB).
- Policy implication:
  - NRI deposits are a substantial and relatively stable source of foreign exchange but remain sensitive to standard risk‑and‑return factors — underscoring the importance of maintaining stable economic conditions and a sound policy stance.
- Areas for future research:
  - Study geographical composition of deposits to better understand external shocks affecting inflows.
  - Joint analysis of NRI bank deposits and remittances, as they likely share common determinants.

*Source: _wp0448 - Section IV presents the econometric results. Section V concludes.*

### Box 1. Regulations Governing NRI Deposits

### Box 1. Regulations Governing NRI Deposits

### Chronology of regulatory changes (selected milestones)
- February 1970: Rupee-denominated account—the Nonresident (External) Rupee Account (NR(E)RA)—was introduced. This provided for repatriation of both principal and interest.
- November 1975: Foreign currency denominated deposit facility—the FCNRA—was added. These deposits were also repatriable and were made attractive to the banks through the RBI assuming the exchange rate risk.
- November 1990: A nonrepatriable scheme, the FC(B&O)D, was introduced which was open to both foreigners and NRIs. The scheme was terminated in July 1993.
- June 1991: A new foreign currency scheme, the FCON was introduced. Its distinguishing feature was that the principal was not repatriable.
- June 1992: A nonrepatriable rupee-denominated scheme, the NR(NR)D, introduced. Banks allowed to fix interest rates on these deposits.
- May 1993: A new repatriable foreign currency scheme, the FCNRB, was introduced, which differed from the FCNRA in that the banks were made to bear the exchange rate risks themselves.
- August 1994: FCNRA scheme was closed to new deposits with effect from August 1994. By 1997, all remaining balances had been repaid.
- April 2002: No fresh deposits to be accepted under NRNR scheme, overdue NRNR deposits not to be renewed, may be credited to the NRE accounts. If the NRNR deposits holder does not hold NRE account, he may be allowed to repatriate the maturity proceeds of the NRNR deposits outside India.
- July 2003, September 2003, October 2003: Ceiling on interest rates on NRE deposits fixed at 250 bps, 100 bps, and 25 bps above the LIBOR, respectively.

### Interest rate, maturity, and repatriability policy developments
- May 1994: The maximum interest rate on rupee deposits reduced to 10 percent (the same as on domestic deposits).
- October 1994: The maximum interest rate on rupee deposits was further reduced to 8 percent (2 percentage points below the ceiling on domestic deposits).
- October 1995: The maximum interest rate on rupee deposits increased to 12 percent.
- April 1996: Interest rates on term deposits with maturity of two years or higher freed.
- April 1997: Interest rates on term deposits with maturity of one year or higher freed; interest rates on FCNR(B) permitted to be determined by the banks subject to ceilings.
- September 1997: Interest rates on deposits of all maturity freed.
- October 1997: FCNR (B) deposits to be offered at LIBOR of the relevant currency and maturity.
- April 1998: FCNR (B) deposits of maturity of one year or higher to be offered at 50 basis points above LIBOR and lesser maturity deposits to be offered at 25 basis points below LIBOR.
- October 1999: Minimum maturity of foreign currency deposits raised from six months to one year.
- April 2002: FCNR(B) deposits with 1–3 years maturity to be offered at LIBOR/swap rates for respective maturities/corresponding maturities minus 25 basis points.

### Repatriability and scheme-specific rules
- NR(E)RA (introduced February 1970): rupee-denominated, repatriation of both principal and interest permitted.
- FCNRA (introduced November 1975; closed to new deposits August 1994): foreign currency denominated, repatriable; RBI originally assumed exchange rate risk.
- FC(B&O)D (introduced November 1990; terminated July 1993): nonrepatriable, open to both foreigners and NRIs.
- FCON (introduced June 1991): foreign currency scheme where principal was not repatriable.
- NR(NR)D (introduced June 1992): nonrepatriable rupee-denominated scheme; banks allowed to fix interest rates.
- FCNRB (introduced May 1993): repatriable foreign currency scheme where banks bear exchange rate risk (contrasting with FCNRA).

### Recent regulatory interventions (2002–2003)
- April 2002: Discontinuation of accepting fresh NRNR deposits; overdue NRNR deposits not to be renewed; options for credit to NRE accounts or repatriation outside India if the depositor lacks an NRE account.
- April 2002: FCNR(B) pricing for 1–3 year maturities specified as LIBOR/swap rates for respective maturities/corresponding maturities minus 25 basis points.
- July 2003, September 2003, October 2003: Progressive tightening of ceilings on interest rates on NRE deposits to 250 bps, 100 bps, and 25 bps above LIBOR, respectively.

*Source: IMF staff compilation from the original Box 1 text.*

### References

### References

### Listed references
- Acharya, Shankar, 2001, India’s Macroeconomic Management in the Nineties, ICRIER Working Paper, ICRIER, New Delhi.  
- Gordon, James, and Poonam Gupta, 2003, “Portfolio Flows into India: Do Domestic Fundamentals Matter?” IMF Working Paper, 03/20 (International Monetary Fund: Washington).  
- Hamilton, James, D., 1994, Time Series Analysis (Princeton, New Jersey: Princeton University Press).  
- India, Government of, 2002, “India’s External Debt: A Status Report,” (New Delhi: Ministry of Finance, Department of Economic Affairs).  
- Kaul, Sameer, 2000, “Managing Nonresident Deposits,” in External Debt Management-Role of Financial Intermediaries, Proceedings of CRISIL Seminar, Goa, September 6–8, 354–357.  
- Mohanty, Deepak, Muneesh Kapur, and Satyananda Sahoo, 2000, “Management of Nonresident Deposits,” in External Debt Management-Role of Financial Intermediaries, Proceedings of CRISIL Seminar, Goa, September 6–8, 335–346.  
- Reserve Bank of India, 2000, “Report of the IDF Project on Nonresident Deposits” (Mumbai; RBI, Department of Economic Analysis and Policy), October.

*Source: _wp0448 - References*

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