Government unlikely to go for NRI deposits to stem falling rupee: ET NOW

Contrary to market expectation and despite the clamour from foreign investors, the Modi government is not looking at NRI deposits to the stem the Rupee's fall as its predecessor UPA did in 2013. This is what a senior government official told ET Now, and added that the RBI is studying the feasibility of allowing oil marketing companies to buy dollars directly from it or a special window as opposed to buying the greenback currency from the open market.

The reasons for the Modi government not going in for a NRI deposit scheme or FCNR (Foreign Currency Non Repatriable) Deposit scheme are manifold. The most important is the LIBOR movement. In September 2013, the 1-year USD LIBOR was 0.63% and that is today much higher at 2.88%. This means the NRI deposit scheme if announced today would turn out be a far more expensive proposition.

What's more, the government believes such schemes will end up being a pure arbitrage play, and that's something India cannot afford right now. "Interest rates are around 2% in USA, and will be minimum 9% in India under the scheme. That's a minimum 7-8% arbitrage and so it is not a good time to introduce the scheme,"explains the government official.

NRI Bonds and forex deposits are raised from Non Residents at attractive periods for up to 3-5 years at attractive rates and guarantees from the Reserve Bank. The higher Libor rate coupled with lower interest rates in countries like the USA is why the Modi government is not keen to announce the NRI deposit scheme.

Foreign banks and foreign investors are likely to be disappointed as such a scheme would have been good for business. They have been arguing that it worked in 2013, and a $30-35bn FCNR scheme is the right prescription to prop up the Rupee. The Modi government disagrees and is convinced its a short-term fix that delays the problem, as explained by a senior official, "Nearly $27 bn of FCNR bonds will come up for maturity next year. Will that not add pressure to the Rupee?"

ET Now learns the government for now will constinue to look at measure that will contain the Current Account Deficit, and improve its ability in financing the deficit. The import duty hikes to disincentive import of non-essential goods is to attain that very objective. And that is perhaps why it is looking to deploy a tool used by the UPA and RBI in 2013, which to allow oil retailers to purchase dollars from the Reserve Bank directly or through a dedicated window.