No big change ahead
ARUN K SAHA
Executive Director,
IL&FS
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The Reserve Bank of India (RBI) move to lower the cap on interest rates offered by banks on NRE deposits was triggered by a sharp rise in these deposits ahead of the redemption of the Resurgent India Bonds (RIBs) due on October 1.
But the market does not envisage a paradigm shift in the current scenario on account of the move.
NRE deposits have been a sizable source of foreign currency inflows in recent times (approximate inflows of $6 billion in fiscal 2003) and provided robust support to the rupee outlook.
The latest cap announced on these deposits renders them unattractive to NRIs and could hinder future inflows through this route.
Further, this move will also hurt expectations of reinvestment of a large portion of the RIB redemption flows.
However, in spite of this move, the overall scenario will not undergo a significant shift. The alternative investment avenues for NRIs are even less attractive as the rates offered on dollar deposits are sub Libor.
Though the move has reduced the covered interest arbitrage available to NRIs, it has not been able to eliminate it altogether. Hence, money will continue to flow into India