Mauritius beckons Indian banks

Indian banks with operations in Mauritius "" State Bank of India and Bank of Baroda "" could look forward to newer business opportunities, along with tax breaks, with the African nation working on creating a vibrant futures and forward market in foreign exchange.

Bank of Mauritius Governor Rundheersing Bheenick told Business Standard that even if the economy was suffering a deluge of foreign exchange inflows, most of the operations were restricted to the spot market.

Vibrant futures and forward market will help in creating an active foreign exchange market and newer instruments for its entrepreneurs to hedge and trade in the financial services sector.

"In this field, we are actively looking forward to co-operation from Indian banks, which have good experience. As an incentive, we can offer tax concessions on income, which will, of course, be for all foreign and strategic partners involved in this area and not only for banks from India," said Bheenick, who met Reserve Bank of India Governor YV Reddy on Friday. These tax concessions will, however, be only for the first movers, he later clarified.

A forward and futures market in foreign exchange offers an opportunity to the businesses and banks to hedge their foreign exchange risks by booking foreign currency in advance. Going forward, these entities can also trade in such products and earn if they have a view on the foreign exchange rates.

Bheenick also mentioned that since Mauritius is strategically located to tap Islamic population in Africa, Bank of Mauritius will actively consider any application from Indian banks to open full-fledged Islamic banking operations in Mauritius.

"It can even be a full-fledged bank with special window for the Islamic banking as we see a lot of opportunities there," he said.

The cautious central bank chief, however, did not comment on the ongoing tussle over the double taxation avoidance treaty between Mauritius and India. "It is not under my purview," he said.

In response to a query on solving the constant worry of Indian authorities on the nature and source of funds coming from Mauritius, Bheenick said, the African country was among the most anti-money laundering-compliant nations in the world.

India receives nearly 50 per cent of its foreign direct investment from Mauritius and tax authorities believe that some of it is Indian money which comes back in what is referred to as round-tripping of investment.

In order to combat the huge foreign exchange inflows, the island nation is considering a series of options, including developing currency futures and forward market.

The government is encouraging cash-rich public sector enterprises like the National Pension Fund and State Trading Corporation to operate like sovereign wealth funds (SWF) and pick up strategic stakes in foreign markets and across sectors.

The bank also encourages its public institutions to be become portfolio investors in other markets to encourage outflow of foreign exchange. Portfolio investors are short-term players who invest in markets globally.

At present, the Mauritian central bank has temporarily suspended the reverse repo facility to absorb excess funds from the market. These funds are being realised when the central bank of a country absorbs excess dollar funds from the market.

While Indian banks park their excess funds with the RBI by participating in reverse repo transactions, in Mauritius there is a special deposit facility where these funds are parked.

The bank is, however, now considering a review to reintroduce reverse repos. Bheenick reiterated that the primary concern was to have a positive interest rate difference between the repo rate (9 per cent ) at which funds are injected in the financial system and inflation which is currently around (8-9) per cent.

RBI not keen on MoU with Bank of Mauritius

The Reserve Bank of India is not in favour of a memorandum of understanding with the Bank of Mauritius for sharing of information in the financial sector.

According to sources, Bank of Mauritius has shown keen interest in signing an MoU with RBI. Incidentally, the Securities and Exchange Board of India has already signed an MoU with its counterpart in Mauritius for exchange of market data and information.

A similar mechanism for the banking sector would be useful since RBI has consistently raised queries over the source of foreign exchange inflows originating in island nations like Mauritius.