Hot money check

NRE DEPOSITS/ It's taxable at par with domestic deposits

Finance minister P Chidambaram's proposal in the Union Budget to make interest income from non-resident external (NRE) deposits taxable at par with domestic deposits is in line with the recommendation of the internal group of the Reserve Bank of India on external liabilities of scheduled commercial banks.

According to bankers, the move is a fallout of the comfortable foreign exchange reserves. Besides, the government also wants to encourage genuine long term investments and discourage inflows of "hot money". They also said this will also lead to reduction of the overall external debt by the country.

In order to nullify the arbitrage in the interest rate differential between the overseas currency and rupee, the RBI has effected four rounds of interest rate cuts on NRI deposit schemes.

The last cut was made with effect from close of business in India on April 17, 2004, when the interest rates on NRE savings deposits was capped at Libor/Swap rates for six-month maturity on US dollar deposits.

The RBI feels that the NRI deposit inflow has grown much larger and therefore there is no such need to give these benefits in the light of the comfortable forex reserves.

The RBI report had also stated that all foreign currency accounts that are allowed to residents for transaction purposes should also be non-interest bearing in nature so that risk of dollarisation is under check.

While resident foreign currency (RFC) scheme may be made non-interest bearing, export earner's foreign currency (EEFC) and RFC (domestic) should continue to remain non-interest rate bearing.