Centre mulls dollar deposit scheme for NRIs to curb rupee slide
This is the first time a government official has admitted that the government is seriously considering such a move, although there has been wide speculation on this front.Updated: Oct 17, 2018 23:01 IST
India is considering a dollar deposit scheme for non-resident Indians (NRIs) to stem the decline of the rupee by increasing dollar inflows, a senior official in the finance ministry said on condition of anonymity. The exact contours of the scheme are being worked out, this person added.
This is the first time a government official has admitted that the government is seriously considering such a move, although there has been wide speculation on this front.
So far this year, the rupee has lost 15% of its value vis-à-vis the dollar and has been among the worst performing currencies in emerging markets. The falling rupee, rising crude oil prices (which pinch even more because India imports 80% of its oil requirements) and an uncertain export outlook because of a looming trade war have caused trade deficit to widen.
Meanwhile, rising interest rates in the US have triggered capital outflows, eroding foreign exchange reserves and increasing pressure on the rupee.
The proposal for the NRI dollar deposit scheme follows the Centre increasing tariffs on a range of goods and the Reserve Bank of India easing regulations on raising of money from foreign markets.
Such schemes – they have been used in the past as well – provide a cushion to the value of the rupee by bringing in foreign currency for a stipulated period of time, unlike hot money flows that can move out any time.
To be sure, they also entail an additional cost in terms of interest payments, as they carry a premium vis-à-vis the market rates.
There are three major instances of such a scheme being launched in the post-reform period: the Resurgent India Bonds in 1998, the India Millennium Deposit scheme in 2000 and Foreign Currency Non-Resident (Bank) Deposit scheme in 2013. These schemes brought in foreign exchange deposits of $4.2 billion, $5.5 billion and $34 billion respectively.
These values amounted to around 12%-13% of the country’s total foreign exchange reserves during those years. If this trend continues, the scheme can be expected to bring in around $50 billion this year, given the fact that current stock of foreign exchange reserves is around $400 billion. India’s foreign currency reserves have gone down by at least $23 billion in the last two quarters.
Since these schemes promise payment in dollars after the maturity period, their fiscal cost depends also on the exchange rate. If the rupee depreciates even more when the deposits mature, the economy will have to bear a greater burden in rupee terms to pay back the promised amount.
The rupee depreciated around 8% between the announcement and maturity of the schemes which were unveiled n 1998 ad 2013. The 2000 scheme was different as the rupee gained 4% vis-à-vis the dollar between announcement and maturity.
Options such as NRI deposits should be the last resort in crisis management on the external front, as they entail a high cost and can at best postpone an imminent balance of payment crisis, if other things do not improve, said Soumya Kanti Ghosh, chief economist at State Bank of India.
Ghosh added that recent developments in the global economy might have reduced the need to go for such a measure.
With global growth forecasts coming down, India might be in for a respite on oil prices, which will provide a cushion to both the rupee and the trade deficit, he said. The rupee has already been showing signs of strengthening in the last few days, Ghosh added.
The rupee closed at 73.47to the dollar on Tuesday. It has gained 1.37% since touching a low of74.49 on October 11.
First Published: Oct 17, 2018 22:47 IST