While the outstandings under the FCNRA scheme would be liquidated by the middle of April 1977 without any disruption, it must be recalled that at the time of the balance of payments crises, the FCNRA scheme posed a real threat to the country as nearly 80 per cent of non-resident deposits were under this scheme. The closure of the FCNRA scheme has been effected without any disruption as deposits have shifted to other schemes and since the termination of the scheme in 1994 total non-resident deposits have risen from about $16 billion to around $ 21 billion at present. Too rapid a growth of non-resident deposits brings in its wake problems when the balance of payments is under pressure. It is, therefore desirable to discourage the volatile type of deposits which play on arbitrage margins. For instance, at present interest rates of FCNRB dollar deposits and given the very moderate forward cover costs, it is money for jam for the banks without any risks. But the potential danger is that such deposits would vanish
the moment forward premia rise. Hence, it is desirable to moderate the growth of these deposits.
The NR(NR)RD scheme now has close to a total amount of about $6 billion and in the context of the proposed move to capital account convertibility (CAC) the continuation of such a scheme is anomalous. The moment the CAC recommendation on resident individuals being allowed to hold financial assets abroad is implemented, a logical corollary would be that the non-repatriable deposit scheme would become inconsistent as non-resident non-repatriable deposits would become repatriable. The scheme should, therefore, be terminated and maturing deposits could be allowed to be locked into a three-year maturity under the Non-Resident (external) Rupee Account (NRERA) scheme. This will ensure that the NR(NR)RD scheme would be terminated smoothly without any bunching of maturities. The closure of the NR(NR)RD scheme had best be undertaken by an early date as at present the scheme is a safe one-way bet under which the depositor gets a tax free rate of interest which is higher than domestic deposit rates and an eventual
convertibility is now more or less assured. As such, continuation of the scheme would be detrimental as it is now too costly for the country. It should, however, be mentioned that the NR(NR)RD scheme did provide considerable stability during the period 1993-97 when, the RBI was undertaking the restructuring of the FCNRA scheme. The scheme has now clearly outlived its utility and it should be terminated very quickly. Delay in terminating the NR(NR)RD scheme would be costly as in the case of the FCNRA scheme under which there was flood of inflows between the announcement in February 1994 of the intent to move towards current account convertibility and the closure of the scheme in August 1994.
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At the present time, the FCNRB scheme has outstanding deposits of around $8 billion out of total non-resident deposits of around $21 billion. Again, this scheme was particularly helpful as it greatly facilitated the phased withdrawal of the FCNRA scheme. It is interesting to observe that the FCNRA scheme has outstandings of $10.6 billion at the end of March 1993, and since the FCNRB scheme was introduced in 1993, the total of FCNRA and FCNRB deposits has been a little over $10 billion except that with the phased reduction of the FCNRA deposits there has been a gradual increase in FCNRB deposits.
While the problem of the phasing out of the FCNRA has been undertaken in a smooth manner, there is a need for an overall assessment of the non-resident deposit schemes to ensure that, once again, these schemes do not create longer term problems while meeting short-term expediencies.
It will now be necessary to focus attention on the maturity of FCNRB deposits which are excessively clustered around the six months maturity (in contract to FCNRA deposits which were clustered around the three-year maturity). As a result, the country's short-term debt is going up needlessly. With longer-term forward cover emerging the minimum period for FCNRB deposits could be revised from six months to one year. To the extent there is some outflow of FCNRB deposits it may in fact be desirable.
At present, non-resident deposits are subject to only an incremental 10 per cent cash reserve ratio (CRR) over the outstanding level of April 11, 1997. For an average effective CRR of 3 per cent on outstandings, under the present 10 per cent incremental CRR, the non-resident deposits would need to rise from about $21 billion to $25 billion. In the current milieu of large capital flows it would be best to impose, in addition to the 10 per cent incremental CRR, a 3 per cent average CRR on the outstandings; this could in the first instance apply only on FCNRB deposits. There is much merit in differentiating between FCNRB and NRERA deposits with the reserve requirements some what lower on the latter. At the present time, the FCNRB deposits are far too lucrative. There is an inherent structural problem with the FCNRB scheme in that the inflows are large when they are least wanted and they dry up when they are needed. While it is not possible to switch on and switch off such schemes there is much merit in
expeditious variations of the CRR on FCNRB deposits.
As an overall policy, the aggregate level of non-resident deposits should grow at a slower pace than domestic deposits. Non-resident deposits are very costly from the national point of view, taking into account tax benefits, and while these schemes cannot totally be stopped, a slowdown in the growth of such deposits is desirable.
To sum up, the following measures need to be considered :
The NR(NR)RD scheme should be discontinued;
The FCNRB scheme should have a minimum maturity of one year;
An average CRR of 3 per cent should be imposed on outstanding FCNRB deposits.
As an overall policy the growth of non-resident deposits should be lower than the growth of domestic deposits.