RBI efforts to curb 'hot money' inflows

MUMBAI MAY 22. The Reserve Bank of India today stated that it has taken precautions to curb inflows of `hot money' or `short term deposits' and the inflows of these so called money or funds by way of non-resident Indian (NRI) deposits are not expected.

"As announced in the Monetary and Credit Policy for the year 2003-04, the minimum maturity period of fresh Non-Resident (external) (NRE) deposits has been increased from six months to one year similar to FCNR (B) deposits.

Thus, inflows of the so-called `hot money' or `short-term funds' by way of NRI deposits are not expected," the RBI stated.

There were reports that inflows into NRI deposits have been taking place in order to take advantage of arbitrage opportunities. Arbitrage opportunities are possible on account of higher domestic rupee interest rates than the dollar/ euro interest rates abroad.

Speaking to The Hindu, RBI spokesperson said that the central bank was trying to bring the interest rate and maturity of non-resident deposits on a par with domestic deposits if it was a rupee deposit and in the case of foreign currency deposit, it tried to bring on a par with international scenario.

"It was part of the Monetary and Credit Policy in the last three to four years," she added.

The RBI further stated that NRI rupee deposits in dollar value terms rose only marginally to $2,804 million during 2002-03 from $2,728 million in the previous year.

The trend has been negative during the last quarter of 2002-03 financial year when the dollar was depreciating against the rupee. "Thus there is no significant increase in the inflows.

The trend has been similar even during the last quarter of the fiscal year 2002-03 (January-March) when the dollar was depreciating against the rupee. It stated that the inflow into NRI deposits during this period amounted to only $434 million, marginally lower than $474 million during the same period last year.

In view of the discontinuation of the non-resident (non-repatriable) rupee deposits (NRNR account) during 2002-03, there has been an outflow of $3,704 million from these accounts into NRE accounts.

"It clearly shows that the RBI is aware of all these arbitrage," said K. N. Dey, Director, Basix Forex, a forex dealing firm. "Based on these comments it is more clear that the rupee will be appreciating in the coming days and the RBI is comfortable at the present exchange rate," he added.

As the RBI is comfortable with the present rupee appreciation, the central bank would only intervene if there is any excess volatility in the market. Such arbitrage also exists in other countries. On the other hand, people are losing confidence in the dollar.

At this present rate of rupee appreciation, "we might see rupee to a dollar at 46.50 by the end of June".

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