NRIs leverage arbitrage window in treasury bills

The cut in the interest rate on rupee-denominated deposit schemes for non-resident Indians (NRIs) seems to have spurred NRIs into leveraging the arbitrage opportunity in treasury bills.

They are taking loans against their deposits and investing in treasury bills. Some are converting their deposits into rupees "" with or without a forward cover "" to hedge the foreign exchange risk.

It is optional for a customer to take a forward cover while converting dollars into local currency.

Even though forward dollars have started commanding a premium across maturities, a rough estimate puts the interest rate gain out of this arbitrage to almost 4 per cent as against 1.9 per cent earned as interest on one year NRI deposits.

For example, with a forward cover of 0.5 per cent for the six months forward dollars, a 4.52 per cent interest earned on investments in 364-day treasury bills amounts to a net earning of around 4 per cent.

In line with the global hardening of interest rates, yields on short-term sovereign papers have gone up. The yield on 91-day treasury bill has risen from 4.26 per cent to 4.5 per cent in a couple of months.

Interest on NRI deposits is linked to the six-month London inter bank offer rate.

According to dealers, even though interest rates have started going up after the base rate hikes by the central banks of United Kingdom, Australia, New Zealand, the arbitrage opportunity exists in the Indian market.