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Bigger forex kitty to hasten capital account free float

Mumbai, Dec. 20: While forex reserves may burgeon further to $135 billion next year on account of higher foreign inflows, capital account convertibility could now be a reality in the next couple of years.

Finance minister Jaswant Singh said on Saturday India’s forex reserves crossed the century mark on December 19. However, the announcement did not surprise banking analysts.

“This was expected. While inflows from foreign institutional investors (FIIs) are the highest ever in a calendar year, inflows from non-resident Indians (NRIs) too have been strong,” a senior official from a leading private sector bank said.

It is felt that if the present trend of strong inflows from FIIs and NRIs were to continue, the nation’s reserves may surpass the $125-billion mark next year.

“If the current momentum persists, the forex reserves can reach $125-135 billion next year,” IndusInd Bank senior vice-president Shahrukh Wadia said.

According to Wadia, in addition to the inflows from FIIs, which recently crossed the $7-billion mark, the NRI funds have also been robust at the end of the calendar year.

“It is usually observed that at the end of a calendar year, inflows from NRIs are not that strong. It picks up in January. However, this time, there is an active NRI interest,” he added.

The strong response from expatriates is largely due to the interest rate differential between India and other countries. It has come despite the Reserve Bank of India (RBI) acting against arbitrage-driven dollar inflows.

The central bank had on October brought down the ceiling on interest rate on fresh repatriable non-resident (external) rupee (NRE) deposits at 0.25 per cent above Libor down from the current stipulation of 1 per cent. This was the third revision in the ceiling on NRE deposit interest rates since mid-July.

“With the RBI’s attempts to rein in such arbitrage opportunities clearly failing, it will be a tough call for the central bank to control such inflows,” a treasury chief added.

Bankers feel that surpassing the $100-billion mark could soon bring in full capital account convertibility. “We could see a full capital account convertibility by July 2005,” a banker said.

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