RBI study recommends rate cap on NRI deposits

By SiliconIndia   |   Monday, 24 May 2004, 07:00 Hrs   |    1 Comments
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MUMBAI: An internal group of the Reserve Bank of India (RBI) on Monday recommended banks cap the interest they pay on expatriates' rupee deposits at the one-month LIBOR rate, which analysts said would curb short-term dollar debt.

The recommendation is in line with the central bank's efforts to choke the inflow of dollars from arbitrage-seeking expatriate depositors, which has led to a build-up of short-term liabilities in the banking system and added to upward pressure on the rupee.

In April, the RBI lowered the interest rate ceiling on local bank deposits offered to expatriates, telling banks to pay rates not exceeding dollar LIBOR/swap rates on rupee denominated term deposits offered to expatriate Indians.

These deposits, called Non-Resident (External) Rupee or NRE deposits, typically have a maximum maturity of three years.

"The main recommendations of the group are a continuation of the central bank's line of thinking, which is clearly to disincentivise the taking of these short-term debt creating deposits," said analyst at ICICI Securities, A Prasanna.

"The central bank is clearly very comfortable with the external balance of payments situation and sees no need to encourage these deposits."

Data released by the central bank on Saturday showed India's foreign exchange reserves rose to a record $118.63 billion in the week ended May 14.

The reserves pile, which is the sixth-largest in Asia, has been built amid strong trade and foreign capital inflows as well as continuing remittances by expatriates, both as money to relatives in India and to earn higher interest on their deposits.

Under the NRE scheme, expatriates remit their deposits in foreign currency, which is then converted and held as rupees. The rupees are converted back into foreign currency on maturity.

The ceiling on interest rates was first imposed in July 2003 at 250 basis points over LIBOR, and then cut to 100 basis points in September. A month later, the ceiling was again lowered to just 25 basis points over LIBOR.

The central bank's internal group on external liabilities of banks also recommended on Monday that the rate on expatriates' rupee deposits be linked to the LIBOR rate of corresponding maturity and that all expatriate deposits be taxed in line with domestic deposits.

The rupee hit a 51-month closing peak of 43.55 against the dollar in April, despite central bank intervention to cap its gains. Election-related uncertainty has since weighed on the currency, which was around 45.34 per dollar on Monday.

The cental bank group's recommendations are available for comment on the RBI's Website www.rbi.org.in.



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