Remittances Go To Current Account; Deposits To Capital Account
India is the largest recipient of remittances by its diaspora across the world with annual inflows of over $20 billion for almost four years now. But a chunk of this money is not new money sent by migrant Indians. Almost half the money is conversion of NRI deposits into the accounts of their relatives back home. But this year there is a slight shift in the pattern with NRIs opting for direct remittances, instead of parking them in deposits.
Remittances are reflected in `private transfers’ in the balance of payments. It comprises remittances for family maintenance, local withdrawals from Non-Resident Rupee Account, gold and silver brought through passenger baggage, and personal gifts/donations to charitable/religious institutions.
According to the latest data analysed by the RBI, of the total remittances (private transfers) amounting to $19 billion during April-September’07, $8.3 billion was local withdrawals of NRI deposits. While $9.4billion was on account of inward remittance for family maintenance. The share of this component which contributed a significant share of remittance flow to India at about 60% in 1999-2000 dipped to 47% in 2006-07. In the first half of 2007-08, however, the share of inward remittances was about 50% of total remittance flow to India.
According to the RBI, in the recent past, a rising trend of local withdrawals can be attributed to the income levels of migrants, ease of transferring money through NRE deposits and rising investment opportunities domestically. A recent survey on the pattern of remittances indicates that not all the money which comes in the form of remittances for family maintenance is actually used for the purpose it is sent for. With the Indian markets booming and offering attractive returns, NRI money is increasingly flowing into lucrative avenues such as stock markets and real estate.
Given the trend in these other markets, a senior banker points out that NRIs have gone slow on parking their money in NRI deposits and are increasingly choosing the remittances route which helps them earn a better return than on bank deposits. This also explains the reason why the share of remittances, which was seen dipping until 2006-07, has again improved in the first half of FY’08.
What distinguishes remittances from NRI deposits is that, while remittances are treated as private transfers, which are included in the current account of the balance of payments, inflows from overseas Indians for deposits in the NRI deposit schemes are treated as capital account transactions. The RBI study notes that a major part of outflows from NRI deposits (on the average 85% of total outflows) is in the form of local withdrawal from NRI deposits. These outflows, however, are not actually repatriated and are utilised domestically.
The Reserve Bank study says that given the better investment opportunities domestically and higher interest rates, it is expected that the inflows may continue through the route of local withdrawals.