by Moiz Mannan
During the past few years, when the Indian rupee was taking a battering, the Indian government did everything possible to shore up its stock of dollars with the help of deposits from non-resident Indians. Now that the crisis appears to have eased out, the financemen are worried about how patriotic is this money really.
With a diaspora strength of more than 25 million people, it is not surprising that India frequently looks to tap this vast potential in tough times or otherwise. In the midst of a balance-of-payments crisis in 1991, India used a tax-forgiveness plan for NRIs to get them to bring money home.
In 1998, it issued a five-year Resurgent India Bond offering 7.75 per cent in dollar terms, raising more than $4.8bn. In 2000, it raised $5.5bn through an India Millennium Deposit scheme, which paid 8.5 percent for five-year dollars.
The last such crisis faced by India was that of a huge current account deficit and a plummeting currency. Once again, the country made it more attractive for its overseas citizens to pump money into the home economy.
Incremental flows of deposits into Non-Resident Rupee Account Scheme (NRE)/Foreign Currency Account Scheme (FCNR) were made exempt from cash reserve ratio and statutory liquidity ratio requirements. Incremental flows were also exempt from priority sector lending requirements. Interest rates on deposits in foreign currency accounts were deregulated.
The Reserve Bank of India (RBI raised the ceiling on interest on longer-term deposits of non-residents by 100 basis points in a bid to attract foreign currency flows. For foreign currency non-resident bank (FCNRB) accounts with maturities of 3-5 years, RBI raised the interest rate ceiling to Libor/Swap plus 400 basis points from Libor/ Swap plus 300 basis points. RBI also removed the ceiling on interest rates on non-resident external rupee deposits with maturities of three years and above. Since interest rates offered by banks on NRE deposits cannot be higher than those offered by them on comparable domestic rupee deposits, RBI decided to give banks the freedom to offer interest rates on all incremental NRE deposits without any ceiling.
The current account deficit, which touched a record high of $87.8bn in 2012-13 dropped to $32.4bn in 2013-14. On September 1 this year, India’s current account deficit narrowed sharply to 1.7 per cent of the GDP.
Now that’s good news. The bad news, though, is that this is ‘hot money.’ That is to say, there’s no telling when it will fly away. So, worries over the current account deficit and forex reserves have given way to concerns over external debt.
Recent data released by India’s finance ministry point to the fact that NRI deposits now account for almost a quarter of India’s total external debt, standing next only to external commercial borrowings, which have the largest share at about a third of India’s total external debt. In its annual publication titled ‘India’s external debt: A status report 2013-14’ released a few days back, the Department of Economic Affairs (DEA) said the rise in external debt was due to long-term debt, particularly NRI deposits.
According to the report, the surge in NRI deposits reflected the impact of fresh FCNR(B) deposits mobilised under the swap scheme during September-November 2013 to tide over the difficult BoP (balance of payments) situation in the initial parts of the year.
The country’s external debt stock increased 7.6 percent over the last fiscal and stood at $440.6bn at end-March 2014, increasing by $31.2bn over that at end-March 2013.
External debt of the country continues to be dominated by the long-term borrowings. At the end of March 2014, NRI deposits in India were estimated at $104bn. In 2011-12, the share of NRI deposits in the total net capital flows was 17.6 percent and in 2013-14, it shot up to 79.7 percent.
Apart from the incentives, exchange rate leverage and other purely technical advantages that have attracted NRI investments, the underlying reason has been confidence in the performance of the Indian economy. A vast majority of NRI have left home shores for economic reasons and are generally astute investors.
One might like to think that patriotism drives their decisions, but pragmatism tells us to be cautious in taking this argument at face value. As Business Standard writer A K Bhattacharya says: “The social bond that NRIs have with this country can be an effective argument only as long as investing in India continues to make economic sense for them. So, an increased reliance on NRI deposits to help meet the country’s capital flow requirements is not without risks and should not be played down just because the money is coming from NRIs.”
Indeed, India will have to keep itself economically rather than emotionally attractive to keep enjoying the money sent home.
The Peninsula
