RBI diktat may spawn capital exodus

The Reserve Bank of India's decision to free capital flows up to $25,000 for individuals may trigger capital exodus from the country, feel bankers.

The firming up of global interest rates and expectations of a weak dollar add credence to the theory.

Dealers said while overnight investment in Indian rupee earns around 3.5 per cent, a similar investment in Australian and New Zealand dollar each will fetch 5.25 per cent.

In pound sterling, the investment will earn around 4 per cent. Last week, Bank of England and Bank of New Zealand both raised their base rates.

Even in the recent US Fed meeting, hints were dropped at a possible hardening of rates sooner than later.

Dealers at some of major foreign banks said they had aggressively discounted for 50 basis points rise in Fed rate by end of this calendar year with first stage of the rise happening around July 2004.

They added that this was evident from the fact that while all other segments of the banks were buying gilts, some foreign banks were heavily selling in the market.

Almost all new generation private banks are sprucing up their cross- currency treasury and designing products to facilitate the purpose.

However, public banks "" though equally aggressive "" feel the product will not be a success if the global economy does not recover with corresponding effect on the markets.

They also added that it is not only the higher interest rate which is driving rapid customer enquiries but expectations that dollar will weaken against all major currencies.

Another reason for the currency to weaken is the burgeoning fiscal deficit which has increased further in this fiscal.

However, bankers are unanimous about the view that this time around not only foreign institutional investors will resort to capital flight , but also Indian residents, banks and mutual funds.