NRIs may nearly double their money parking it in India for 3 years

If you’re a non-resident Indian, here’s an offer you can’t refuse. The Reserve Bank of India (RBI) has opened up a new window for you to park your money with an Indian bank for three years, and make up to 22% return on your investment in just three years.

RBI opens a new window for NRI deposits

The RBI has announced that it would offer a subsidy of 1.5% to cover the hedging cost for deposits under Foreign Currency Non-Resident (FCNR(B)) scheme and external commercial borrowings (ECBs). Banks can pass on the subsidy as added interest to attract depositors abroad.

How $1 Million could grow to over $1.8 Million

While banks are yet to reveal the latest interest rates on FCNR(B) deposits, let’s assume a return of 6.5% including the subsidy.

The RBI had introduced the same scheme in 2013 and it allowed the depositor to leverage their personal equity, i.e. if you have $1 million in cash, you could borrow up to $10 million (assuming a leverage of 10 times) locally — where loans are available at a much lower rate — and park that money in India, if the regulator allows similar levels of leverage.

In such a scenario, NRIs may be able to turn a million dollars today into more than $1.8 million in just three years.

Here’s a sample calculation based on estimates: The Power of FCNR deposits and borrowing

Particulars	Amount
A NRI’s cash in hand	$100,000
Borrowed from a foreign bank	$900,000
Total deposit under FCNR(B)	$1 million
Leverage	9x
Assumed interest rate on local deposit (abroad)	4%
Bank charge for currency swap	0.8%
Total borrowing cost	4.8%
Assumed interest rate in India	6.5%
Interest earned in India per year	$65,000
Interest paid on borrowing	$43,000
Return on investment	$22,000 (21.8%)

*Calculations based on research from Emkay Global

Experts believe te scheme is just too attractive for anyone to ignore, and, therefore, it may lead to a flurry of precious foreign exchange flowing into India. With likely access to funds raised at a cheaper rate abroad, along with the added hedging subsidy from the RBI, bank stocks in India are red hot in trade today.

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