Sunday, March 1, 2009

Recession forcing NRIs to dip into savings back home

1 Mar 2009,

The economic crisis in the United States and Britain is reportedly forcing many NRIs to dip into their savings and assets back home. Due to job losses, default of mortgage payments and losses in their businesses, some NRIs are cashing their foreign currency demand deposits in India to stay afloat.

According to a World Bank economist and an expert on immigrant remittances, Dilip Ratha, foreign currency deposits in India have declined by 12 percent between January and December 2008 from $41.2 billion to $36.1 billion.

The World Bank had estimated that India would receive $30 billion, but the Reserve Bank of India data indicated that $39.1 billion had already been received in the first nine months.

According to past trends, the remittances are usually higher for the fourth quarter that covers the festive season. This would mean that the total could be in the region of $45 billion. Obviously, the difference is due to the system for data collection. Despite these conflicting figures, a clear trend is visible in NRIs sending less money to India and also getting some of their deposits back.

Perhaps NRIs are reducing foreign currency deposits in their home country and depositing the money in the US banks? That is unlikely because interest rates in the US are at historic lows, much lower than those in India; and interest rates for foreign currency deposits in India went up in September 2008 as soon as the recession began to emerge in the United States and the rupee began to weaken against the dollar. However, some Indian banks have marginally reduced their rates at the end of January 2009.

Giving reasons why a decline in foreign currency deposits may actually show up as remittance inflows rather than reverse remittances, Ratha maintains that faced with income and employment difficulties due to the financial crisis, some NRIs might be substituting remittances to their families by drawing on foreign currency deposits back home. Indeed, such withdrawal from a repatriable foreign currency deposit to a local currency deposit or cash is considered as remittance inflows in India. This component is believed to make up nearly 40 percent of remittances to India in recent years. And foreign currency deposits have been falling in India last year.

"We have no way of judging the extent of such reverse remittances. Data on outward remittance flows are of questionable quality in most of the countries. Also, many large migrant destination countries do not report high frequency data on inward remittance flows. A modest, and rather indirect, inference about reverse remittances can be drawn from a decline in foreign currency deposits - which are likely held by migrants or their relatives - 12 percent in India," said Ratha.

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