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C. Shivkumar

Bangalore , June 3

NON-resident Indians are beginning to convert their maturing India Millennium Deposits (IMDs) into domestic rupee accounts on the same lines as in the case of Resurgent India bonds in 2002.

Banking sources said that the shift to rupee deposits was expected, despite the slightly lower interest rates on non-resident accounts. At the time of issue, IMDs issued by State Bank of India had collected in excess of $5 billion. The dollar component of the deposits offered an interest of 8.5 per cent fixed for a five-year period. The cumulative deposits offered returns in excess of 10 per cent along with a slew of tax incentives. These IMDs are expected to mature beginning from December this year.

The bankers said that conversion to domestic rupees is expected in view of the exchange rate advantage. In fact, most of the maturing deposits, which had opted for the cumulative scheme of the IMDs, are expected to make some losses due to the shift in the exchange rate. This could push down the effective returns to below 10 per cent. At the time of the IMD issue, the exchange rate against the dollar was close to Rs 46. Presently, the exchange rate is Rs 43.5. This means that in rupee terms, the redemption would actually be cheaper.

But some NRIs took advantage of loan schemes against the deposits. Returning NRIs, for instance, actually availed themselves of housing loans from banks, where the rates of interest were lower than deposit rates on IMDs.

The bankers said that the anticipated redemptions are unlikely to exert major pressures on domestic liquidity. This is despite the high international oil prices. The lack of pressure on the external front, they said, is evident from the low forward premia for six monthsat about 1.3 per cent, even lower than one-month premia.

The major reason for this situation, they said, is on account of the large foreign exchange reserves of $140 billion. Inflows into the country continue from both non-debt capital and current account sources. This has also been one of the major factors contributing to the liquidity build-up during the last few weeks.

Faced with this kind of situation, the bankers said that there is no pressure on them to increase non-resident rupee deposit rates to discourage outflows. In fact, most banks are offering lower rates on foreign currency deposits than on non-resident rupee deposits. Three-year foreign currency deposit rates at 3.8 per cent are at least one per cent below non-resident external rupee deposit accounts. Besides, three-year domestic term deposit rates are about 6 per cent.

Bankers said more NRIs are opting for external rupee deposits. This is in anticipation of further exchange rate appreciation, the advantages of which are expected to offset the low interest rates.

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