The Hindu Business Line : Calibrating inflows

The Reserve Bank of India’s latest Credit Policy offers evidence that the central bank is quite effectively using interest rate adjustments to control capital inflows. Data show, for instance, that almost every kind of inflow has grown, except for NRI deposits that have actually registered a net outflow. Between April and December 2007, while all the components of capital inflows rose 172 per cent to $81 billion, against $30 billion the previous year, NRI deposits wi tnessed a net outflow of nearly a billion dollars, as against an increase of $3.7 billion in the corresponding nine months of the previous year.

The reason? Ceilings on deposit rates were lowered in the Credit Policy of 2007-08. With the RBI hiving 50 basis points off the existing deposit rates, which were already 25 basis points below the London Inter-Bank Offered Rate (LIBOR), the dollar inflow on the NRI account seems to have dried up, resulting in a net outflow. Persistent cuts in US rates by the US Federal Reserve Board, have depressed the LIBOR further, compounding the fall in domestic rates. Early last month, the LIBOR rose a bit but the latest Fed cut will have its impact as western bankers attempt to create a more easy-money policy to ease the credit crunch. As far as the NRI deposit schemes are concerned, however, the message from Mint Street for the current fiscal is clear from the absence of any revision in the deposit rates in the latest Credit Policy.

In sharp contrast, remittances have been surging. India has been consistently the highest recipient of money transfers from overseas workers; last year India received $27 billion, ahead of China’s $25 billion. Remittances are relatively less subject to policy changes, being determined more by family needs than monetary policy or currency movements. The volatility of NRI deposits makes them an unreliable source of capital, a feature that has been noted by policymakers time and again. Remittances, on the other hand, fuel domestic consumption demand, and policymakers would do well to look closely at this critical and unglamorous source of external receipts that accounts for more than 40 per cent of all earnings under Invisibles and helps fill the trade deficit substantially. While North Block and the Commerce Ministry search for ways to address the dollar woes of exporters, it is time some thought is spared for harnessing the enormous potential of this stable source of dollar earnings that can help sustain consumption demand in the most trying times.

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