The Hindu Business Line : NRI funds flow pushing rupee up against dollar

Bangalore, Dec. 19 Foreign currency deposit inflows into the domestic banking system have begun exerting upward pressure on the rupee-dollar exchange rates.

Top bankers said the inflows accelerated during the last week, bankers said, after some of the international banks cut certificates of deposit rates, responding to Federal Reserve Board rate reductions. The flows were mostly from non- resident Indians based out of the US and Europe.

The surge in deposits was also largely in view of the lower interest rates on offer by the international banks. After this week’s reduction in the Federal Funds target rate to 0.25 per cent, one year US certificate of deposit rates have slumped to about 1.9 per cent. In October this year, CD rates averaged 4.4 per cent.

Better offering

However, currently domestic banks are offering rates as high as 3.77 per cent. For non-repatriable rupee deposits, the rates on offer was 4.60 per cent. The better offering from domestic banks was also prompting a large shift by NRIs to Foreign Currency Non resident accounts or to the higher earning non-repatriable rupee account deposits.

Between April and October this year, the deposit inflows were about $ one billion, as against $75 million redemption during the corresponding period of the last financial year. Outstanding Non-resident deposits in October this year amounted to about $39 billion. But, the inflows during the last few weeks had pushed up the deposits in excess of $40 billion, bankers said.

The inflows, bankers said, was a fuelling an upward momentum on the rupee in the domestic foreign exchange markets. This was despite the fact that foreign institutional investors were net sellers in the equities market. The FII exit since the beginning of this financial year from equities was equivalent to about $10 billion.

Bankers said that flows were now beginning to exert upward pressure on the rupee-dollar exchange rates. The rupee ended the week at Rs 47.08 against the greenback or up 6 per cent from November 22 this year, when it had breached the Rs 50 mark.

Scope to improve

But rating Agency CARE’s Economist, Dr. Saumendra K Dash, said, “Weak oil prices are also helping the rupee appreciation. If the equity market continues to maintain the 9,000 range and rebuilds confidence amongst the investors, given other external factors, the rupee-dollar parity has a good scope of improvement.” Essentially this implied that FII exits were likely to slow down in the coming weeks.

Besides, he also added, that if oil prices continued their slide, the possibility for an improvement in the current account also remained bright, implying a further exchange rate appreciation. The positive also reflected in the non deliverable forward market, where the one month Rupee-$ exchange rate is currently quoted at Rs 47.15.

The NDF is forward market in currencies that are not freely convertible and settlements are done in foreign currency particularly the US dollar. However, bankers said that flip side remained; in the immediate future, little capital flows in the form of cross-border debt could be expected in view of the tight liquidity conditions.

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