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GOODNESS GRACIOUS, THE Non-Resident Indian is no more a privileged citizen, ever preferred over ordinary Indians. Arbitrage via banking channels should peter out with interest rates on NRI deposits pegged 100 basis points over Libor, though the Reserve Bank of India could have been bold enough to scrap the favour and placed NRIs on a par with ordinary rupee depositors. In tandem, Overseas Corporate Bodies have been banned from investing in India, a measure long prayed for by many as this animal was fronting for unwanted, hot money flows. A pile-up in forex reserves has helped the RBI to be a bit brave and more prudent about the quality of dollar inflows, as a similar move, say, some five years ago would not have passed government corridors.

There is nominal virtue in atoning for past sins and the RBI Governor, Dr Y. V. Reddy, seems to be doing just that. Over the last two years, the Indian financial and equity markets have acquired the hue of a casino, with dollar punters moving in to make a killing and regulators, having little market intelligence, left twiddling their fingers. In this period, low growth and excess liquidity enabled the RBI bend market interest rates down, for banks and traders to benefit from capital appreciation. But the central bank did little to knock down lending rates and help capital formation, on the plea that the freedom of commercial banks was sacrosanct. The recent surge in the Sensex can be put down to expectations of strong growth following good monsoon, though non-food credit is not showing any appreciable or consistent rise. Capital investment is still lagging even if some bank chairmen are swamped by calls from fresh borrowers. It can be said the current dollar inflows have a speculative edge and the RBI probably does not want to be hijacked by the punters. Excess of rupee notes in the system will always try to punch a leak in the financial system and the RBI will find it hard to soak up rupees as it could run short of government paper to run its open market operations. In a way, the RBI has taken out an insurance cover for the financial system by taking the twin decisions.

But dollar funds from NRIs could and will move into the stock market, and regulators cannot go beyond tracking the flows. By next year they could switch to the commodity market too, making the current ban on OCBs a wee bit ridiculous. By the central bank's own admission, it has little information on the OCBs. But does that justify a ban when foreign funds are coming in designer wear? That the Joint Parliamentary Committee wants it is a specious argument. Banning OCBs may only see a new breed spring up to pass on overseas dollar holding by Indian corporates, as any financial prohibition only makes deals secretive, putting them out of the ken of regulators. Having accepted the inevitability of dollars freely flowing in and out of the market, the regulators are left with the sole option of writing and supervising trading rules. Bans have never worked, at least in India.

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