Govt may resort to tested tool of NRI deposits

New Delhi: As rupee shows no sign of appreciation, the finance ministry has once again revived the special NRI deposit scheme to boost dollar inflows and to ease pressure on the domestic unit.

The reemergence of the NRI bond, also known as FCNR (B) or Foreign Currency Non-Repatriable Remittances Account, is a fixed deposit foreign currency account and not a savings account. Deposits in this account can be made in any of the major currencies like dollar, pound, Canadian dollar, mark, yen and euro.

The measures announced by the government to control rupee depreciation haven’t worked as desired.

The government had hiked import tariffs (to reduce current account deficit), removed withholding tax on interest on masala bonds, relaxed overseas debt regime and removed exposure limits of up to 20 per cent of an FPI bond portfolio to a single corporate group and to 50 per cent to a single company.

Going forward, increased likelihood of US rate hikes, ECB’s decision to halt the quantitative easing programme from the end of this calendar year along with increase in oil prices can further pressurize the Indian currency, said Care Ratings.

A top government official had said in June that if needed the government could raise funds through FCNR deposits, sovereign bonds or other routes to increase foreign exchange reserves. The previous UPA-2 government in 2013 had adopted the strategy tapping NRI deposits to stem the slide in currency then. The Reserve Bank of India (RBI) lured inflows of about $34 billion dollar through discounted foreign currency swaps helping to lift the rupee. The UPA government had issued $34billion dollar (FCNR (B) deposits in September 2013 after the rupee had hit Rs 68.84 during the ‘taper tantrum.’

In September 2013, the one-year dollar LIBOR was 0.63 per cent and that is now much higher at 2.91 per cent and this means the NRI deposit scheme if announced today would turn out be a far more expensive proposition, said a source in the finance ministry. The government is also guarded on the arbitrage issue as such schemes will end up being a pure arbitrage game. Interest rates are around 2.25 per cent in the USA, and will be minimum 10 per cent in India under the scheme. That's a minimum 8-9 per cent arbitrage and will be expensive for any government, the official said

While talk of a $30-35 billion FCNR scheme is seen as the right solution to prop up the rupee, there are certain quarters in the ministry who feel  about $27 billion dollar of FCNR bonds will come up for maturity next year which will also add pressure to the currency.

The weakness in the rupee comes despite recent measures announced by the government to control the current account deficit. Last week, the government raised import tariffs on 19 items, to narrow widening current account deficit and tackle a sharp slide in the rupee.