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K.R. Srivats
Harish Damodaran

New Delhi , Aug. 1

BARELY a fortnight after capping interest rates on non-resident external (rupee) (NRER) deposits to a maximum of 250 basis points above LIBOR, the Government has closed yet another avenue for arbitrage opportunities arising from the wide difference in interest rates offered here and those prevailing overseas.

Non-resident Indians would no longer be eligible to invest their monies in small savings instruments such as Public Provident Fund (PPF), National Savings Certificates (NSCs) and Post Office deposits.

NRIs were so far allowed to invest in NSCs issued by Post Offices subject to the terms and conditions applicable to the sale/issue of such certificates.

If NSCs were purchased out of funds remitted from abroad or from the NRER or foreign current non-resident deposits, the sale/maturity proceeds can be repatriated. In the case of PPF, NRIs could open account out of the monies lying in their rupee denominated, non-repatriable non-resident ordinary (NRO) accounts.

On the other hand, NRIs are not permitted to invest in bearer securities such as Indira Vikas Patras or Kisan Vikas Patras. What the Finance Ministry has done now is to bar NRI investments in non-transferable small savings instruments as well. However, the existing NRI account holders would be allowed to retain their PPF or NSC investments until maturity, subject to such money not being repatriable.

"We want to close all possible avenues, which offer arbitrage opportunities for those seeking to take advantage of the higher interest rates in this country vis-à-vis those prevailing overseas", officials said.

Although it is true that Post Office instruments are normally of longer maturities — which provides little scope for short-term arbitrage gains — the officials pointed out that the investments were also attractive for the tax incentives offered by these schemes.

The NSCs currently offer an eight per cent interest compounded half-yearly for six years.

Besides, investments qualify for tax rebate under Section 88 of the Income-Tax Act, with interest income also deemed as being reinvested to qualify for the same rebate.

A similar tax rebate dispensation is available on PPF accounts, which are of 15 years maturity.

With the small savings route also being effectively plugged, the Government is clearly sending out a message that in the light of the swelling forex reserves position, it is in no mood to offer high interest rates to attract further inflows.

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