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Current a/c surplus, currency valuation lead to forex upsurge

MUMBAI JAN. 31. A substantial portion of fresh accretion in foreign exchange reserves, which have crossed $72 billion, has been by way of current account surplus, non-debt creating capital flows and currency valuation, according to a Reserve Bank of India study.

Debt-creating capital inflows, which includes non-resident deposits, "other assets'' under banking capital and short term loans have contributed to the balance growth, the study said.

"Since the debt creating inflows are significantly low, it may be concluded that the cost of accretion to reserves is not significant,'' it pointed out adding, almost the entire addition to reserves, in the last few years, has been made without increasing the overall level of external debt.

During April 2002 to January 17, India's forex reserves increased from $54.1 billion to $72.4 billion.

The current account had a surplus balance of $2.5 billion as on November end 2002 in the current fiscal as against a deficit of $1.3 billion in April-November 2001.

The study said increase in "other capital'' has been on account of leads in export receipts due to rupee appreciation.

On the arbitrage opportunities, (NRIs taking benefit of difference in interest rates in India and abroad), it said there has been a net increase of $2.1 billion in NRI deposits during April-November 2002. This inflows since 1999-2000 have been in range of $1.5-2.7 billion.

"There is, thus, no evidence to show that available arbitrage opportunities have caused the accretion to foreign exchange reserves,'' it added.

The study conducted by the RBI's Department of Economic Analysis and Policy has said that net earnings of forex reserves during year ended June 2002 worked out to 4.1 per cent.

This excludes valuation changes on account of exchange rate movements between rupee and foreign currencies in which reserves are held and gains/losses on account of movement in gold prices.

On the arbitrage front, it said the interest rate offered at present on Non-resident Foreign Currency Accounts (B){rcub} is 0.25 per cent lower than the London Inter-Bank Offer Rate, whereas the rates offered on Non-Resident Indian convertible rupee deposits (NRE deposits) are broadly in line with the rates offered on domestic deposits of similar maturity.

The rates offered on NRE deposits for tenure of six months to one year, for instance, range from 4.5 to 6 per cent while the interest offered on domestic deposits of similar maturity range between 4.00 to 6.25 per cent.

However, there exists an interest rate differential of three to four per cent between the rates abroad and in India, given the lower interest rates abroad. — PTI

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