NRI deposits turn unattractive; net FDI receipts lower

Our Bureau

Mumbai, Sept 28

The capital flows saw an increase thanks to higher inflows from foreign institutional investors (FIIs) and external commercial borrowings (ECB), in the period April-June 2007.

However, non-resident Indian (NRI) deposits saw an outflow due to a lower ceiling on interest rates.

As per the data on Balance of Payment released by the RBI, net capital flows for the first quarter 2007-08 were at $15.262 billion as against $10.564 billion in the corresponding quarter 2006-07.

ECB inflows, at $7.458 billion ($3.959 billion), accounted for about 45.8 per cent of the total net capital flows. Many corporates raised funds overseas to meet their domestic expansion requirements and to take advantage of lower interest rates abroad, said a senior official from a public sector bank.

NRI deposits saw an outflow of $447 million against an inflow of $1.231 billion. This was because of two downward revisions in the interest rates’ ceiling. In April 2007, the RBI reduced the ceiling interest rate on FCNR (B) deposits by 50 basis points . The interest rate ceiling of NRE deposits was reduced by 50 basis points to Libor/swap rates.

“Earlier, for NRIs, the advantage to put dollar in India was the higher interest in FCNR (B) deposits. It is not so any more,” the bank official said. Portfolio investment of FIs was at $7.458 billion against an outflow of $505 billion last year.

There was both Foreign Direct Investment (FDI) into the country, as well as outward FDI. The inflows under FDI into India were at $5.9 billion ($2.5 billion). This reflected the continuing pace of expansion of domestic activities, positive investment climate and a long term view of India as the investment destination.

Outward FDI also saw a significant rise at $5.4 billion ($1.1 billion), due to the appetite of Indian companies for global expansion. Due to the larger outward FDI, the net FDI (FDI to India minus FDI by India) was lower at $461 million against $1.416 billion.

Currency basket

The currency composition of India’s external debt remained broadly unchanged with the US dollar continuing to remain the predominant currency accounting for 50.4 per cent of the total external debt stock, followed by the Indian rupee (18.0 per cent), SDR (12.3 per cent) and Japanese yen (12.0 per cent).

According to the bank official, dollar will continue to be a favourite because it is easily available the world over. “Historically, international trade and borrowing are in US dollar,” he said.

(This article was published in the Business Line print edition dated September 29, 2007)
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