RBI sets limit on NRI deposit scheme

The new ceiling, which went into effect for non-resident Indians’ repatriable rupee deposits made or renewed on Thursday, works out to 3.75 per cent, assuming the one-year dollar LIBOR at 1.25 per cent. After paying the premium on the one-year dollar, of about 2.5 per cent, a depositor will be left with no return if the full exposure is hedged.

In contrast, the return works out to at least 1.25 per cent on existing one-year deposits, on which Indian banks pay a minimum of 5 per cent. “The argument that higher domestic interest rates were attracting strong foreign exchange inflows and therefore we needed to cut rates has been dashed.” Robust foreign exchange inflows have boosted the country’s reserves to a record high of $82.774 billion on July 4. Analysts said that non-resident Indians could still gain despite the new ceiling if they remained unhedged. Moreover, a slight arbitrage opportunity may still exist as most individuals get less than the dollar LIBOR on their deposits at home. “The rates will still be better than what one can get abroad,” said a banker, adding, “Perhaps the advantage will be of a lower level.” A sizeable portion of the inflows has come from NRIs, who invested $6.36 billion in rupee deposits in the year to April 2003, more than triple the inflows in the preceding 12 months, lured by the much higher Indian interest rates. India’s repo rate — the rate at which the central bank borrow sovereign funds — is now at 5 per cent, while the equivalent US Fed funds rate is 1 per cent.

The central bank announcement caused some anxiety in the currency market, with traders concerned that these expatriate dollar inflows could dry up. The rupee which has gained nearly 4 per cent so far in 2003, weakened to a low of 46.30 per dollar this morning from its previous close of 46.2100/2200. But foreign fund inflows helped it erase losses by late afternoon.