Domestic monetary policy and non-resident Indian (NRI) deposits to India: an empirical analysis

Purpose Deposits by non-resident Indians (NRIs) into financial institutions in India are an important source of foreign exchange for the country. These deposits are considered to be chasing returns and are, therefore, expected to respond to India's domestic monetary policy actions, making them a potentially risky source of capital. This study aims to provide empirical evidence on how a domestic monetary policy shock affects NRI deposits to India. Design/methodology/approach The empirical analysis adopts a structural vector autoregression approach, which enables an examination of the dynamic behaviour of NRI deposits in response to a domestic monetary policy shock. Findings The empirical results reveal that domestic monetary policy shocks (as measured by shocks in the interest rate differential and domestic money supply growth) significantly impact NRI deposits to India, accounting for about 20.7% of the total variation in NRI deposits. Practical implications The results of the study suggest that the central bank can manage NRI deposits through monetary policy interventions. In particular, the study finds that a contractionary monetary policy, which results in an increased interest rate differential, attracts NRI deposits, while an expansionary policy discourages them. Originality/value The available empirical literature on the determinants of NRI deposits to India is limited and has examined only a few factors. Also, the literature lacks a study specifically focused on analysing how domestic monetary policy shocks affect NRI deposits to India and what proportion of total variation in NRI deposits is attributable to such shocks. This study endeavours to address this research gap by analysing the impact of domestic monetary policy shocks, along with a broader set of potential factors, on NRI deposits to India using the structural VAR methodology.