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Hot money vacuum in forex bulge

New Delhi/Mumbai, May 22: The Reserve Bank today clarified that rising foreign exchange reserves is not driven by short-term deposits from expatriate Indians seeking to exploit interest rate arbitrage opportunities.

The country’s central bank said net inflows through expat deposits, for the financial year to March 2003, rose 5 per cent against the 38 per cent jump in forex reserves.

Expat deposits for the year stood at $ 280.4 crore against $ 272.8 crore in 2001-02. Forex reserves, for the same period, were $ 74.8 billion, up from $ 54.15 billion in the year-ago period. During the last quarter of 2002-03, financial deposits inflows stood at a meagre $ 43.4 crore against the surging forex reserves of $ 4.51 billion.

The domestic banks are attractive as it pays around 5 per cent for a one-year term deposit, while the dollar earns around 1 per cent on the same period. Also, the one-year treasury bill yields around 4.68 per cent compared with 1.35 per cent on a two-year US treasury bill.

The country's central bank also said it does not expect a jump in short-term deposits. “Inflows of hot money or short-term funds by way of non-resident Indian deposits are not expected,” the RBI said in a statement.

The minimum maturity for popular deposits plans such as the rupee-denominated Non-resident External (NRE) and dollar-denominated Foreign Currency Non-resident (FCNR-B) was one year.

The rise in NRE deposits has been attributed by the RBI due to its decision to stop accepting fresh deposits under the Non-Resident Non-Repatriable rupee deposit (NRNR) scheme from April 1, 2002. Around $ 3,704 million has moved from NRNR accounts into NRE deposits.

Sources said while NRE deposits were welcome, the central bank has adopted a policy of not giving them “unnecessary encouragement”. Banks have been told to offer interest rates that are on a par with international trends. The rates on NRE rupee deposits should also be in line with yields on domestic rupee deposits.

For instance, rates on FCNR(B) deposits are capped at Libor/Swap rates for the corresponding maturity, minus 25 basis points.

Analysts said the country's relatively high interest rates and a sliding dollar drove foreign inflows. “NRI inflows, along with trade inflow and repatriation of funds, is helping the rupee appreciate against the dollar,” Icra managing director P. K. Choudhury said.

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