Wednesday 5 September 2012

Non-Resident Indians may soon be able to borrow more against their foreign currency deposits in the country

NEW DELHI: , a facility the government hopes will encourage them to park more funds in India helping the country build currency reserves.

At present, NRIs can take a maximum loan of Rs 1 crore against their Foreign Currency Non-Resident, or FCNR (B), deposit, popular non-taxable deposits that have seen a net outflow in the recent months.

"It's felt that the move may boost foreign inflows into the country coupled with the fact that India is offering one of the best interest rates among all countries," said a finance ministry official, requesting anonymity.

The government is looking to encourage capital inflows to fund the current account deficit that touched 4.2% of GDP in 2011-12, the highest since 1991.

The RBI has some reservations about the proposal, but the finance ministry hopes to convince the central bank citing urgent need to boost capital flows. The new limit will be decided in consultation with the RBI.

On Monday, country's largest bank State Bank of India introduced four new currencies-Swiss Franc, New Zealand dollar, Swedish Krona and Danish Krone-in its basket of currencies for FCNR deposits and also increased the interest rates by 8 basis points to 3.87% on deposits of 5-year maturity.

Banks are free to fix interest rates on these deposits within the limit set by the RBI. In the April-June quarter there was a net outflow of $ 696 million from FCNR (B) deposits against an inflow of $545 billion in the same quarter a year ago despite central bank taking efforts to encourage flows.

At the end of March this year, NRIs had nearly $15 billion parked in these deposits. The finance ministry is of the view that the higher loan limit will make these deposits more attractive to NRIs, as they will be able to use the such borrowed funds for investments while their deposits earn an interest not available to them in their home countries.

It is an added bonus if the currency appreciates, which will reduce their borrowing costs when they use their currency deposits to repay the loans.

The RBI is concerned that such money will flow specially into sensitive sectors which may create artificial sectoral bubbles.

"The government should look at other avenues rather than doing away with the limit," an RBI official told ET.

Sector experts agree that the concerns may be overdone.

"Yes, this is a concern. There is a high probability that this money will flow in reality and gold," said Akeel Master, partner and head of financial services advisory firm KPMG. The finance ministry official ET spoke to feels the RBIs concerns are overdone.

"We need to provide them (NRIs) avenues rather than restricting the options. We can look at putting a cap on sectoral exposures," he said.

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