The clever manoeuvering of the Reserve Bank of India (RBI) has not quite impressednon-resident Indians (NRIs). The last six months have seen the flight of over $600 millionin foreign currency non-resident-FCNR(A)-accounts. The FCNR(A) deposits which suffered anoutflow of $1,347 million in 1993-94 and $2,249 million in 1994-95, will obviously receivea much harder blow this year.
Fuelled by the political and economic uncertainty in the country, insecurity seems tohave got a firmer grip on the NRIs. One affected account-holder explains her reasons forbulk withdrawals: "There is so much uncertainty in India right now. With the tumblethe rupee is taking against the dollar, I might as well park my funds abroad, whereinterest rates have started firming up. At least they will be secure and will not losevalue, as they are doing now."
This, for an economy already hobbled by shrinking forex reserves. Down to $17billion by 1995-end, the reserves fell to $16.765 billion last week, hit by the$294-million loan repayment to the International Monetary Fund. The country’slong-term debt repayment obligations, spread between 1994 and 2003 AD, amount to over$73.139 billion, of which $9.948 billion is to be paid in 1996. Worse, India’sbalance of trade which had turned negative to US $4 billion in 1995 is likely to soarbeyond US $5 billion in 1996.
It’s not that the RBI has not been making efforts to stem the outflow of NRIdeposits. Right from when the busy season credit policy was announced on September 29 lastyear, the RBI has been increasing interest rates. For starters, it brought interest onnonresident external (NRE) rupee deposits on a par with domestic term deposits, hiking itfrom 8 per cent to 10 per cent. Later, it raised it to 12 per cent.
It also did away with the cash reserve ratio (CRR) requirement from both foreigncurrency non-resident (banks) [FCNR(B)] and non-resident non-repatriable (NRNR) rupeedeposits. A forex dealer with Weizeman Forex Services says: "The removal of cashreserve ratio (CRR) will have a positive response." The measure is expected to bringthe cost of these funds down, to spur competition among banks to woo the NRI accounts.
Currently, banks are paying an interest rate of 16 to 16.5 per cent on NRNR deposits.This is likely to be raised by 1.5 to 2 per cent. The RBI has already hiked NRNR depositrates to 18.5 per cent. These deposits account for a sizeable portion of the resources ofthe south-based banks. If all banks emulate the central bank and hike their rates, moredollars may flow into the country’s coffers, say bankers. However, they are not veryoptimistic about the deployment of FCNR(B) funds to augment credit flow, despite theremoval of CRR. But it is the high forward cover which is a major deterrent.
The RBI has also been intervening consistently to bring down the forward cover onpremiums. Says Jamal Mecklai of Mecklai Financial & Commercial Services Ltd, one ofthe largest foreign exchange dealers in the country: "Remittances from NRIs took asevere beating during 1995-96 because the sharp rise in the cost of forward cover made ituneconomical for banks to market these products." On January 24, when the RBI did notintervene, the premiums polevaulted: the one month forward cover touched 17.77 per centfrom 11 per cent the day before.
Adds Mecklai: "It seems clear that the RBI’s battle to containmarket sentiment is a long way from won. If players believed that the RBI had things undercontrol, the most likely response to a strengthening of the rupee would be a sharp rise inexporters selling dollars. However, when the rupee rose above Rs 35.80 (after theRBI’s action), the premiums shot up suggesting that importers find Rs 35.80 plus10-12 per cent as an attractive level to cover their positions." On January 25, whenthe rupee crossed the psychological barrier of Rs 36 to a dollar, there were few willingto trade at this high level. Panic gripped the inter-bank foreign exchange marketresulting in increase in spreads to 10 paise. While this sudden drop in the rupee is beingattributed to a sudden month-end demand by oil corporations, the wager today is notwhether the rupee will slide further against the dollar, but by how much and how soon.
