New scheme to mobilise forex deposits from NRIs on cards

After a gap of more than a decade, the government may turn to India’s diaspora to boost foreign exchange reserves. The government and the Reserve Bank of India (RBI) have started discussing the possibility of unveiling a scheme to mobilise deposits from non-resident Indians, similar to the hugely successful India Millennium Deposit (IMD) launched by the State Bank of India (SBI) in 2000.

According to sources, the central bank is keen on such a scheme to attract foreign exchange, as the country’s reserves have seen a depletion in the wake of a weakening domestic currency.

Sources say though no formal communication has been made by the government to the SBI and the lender is yet to discuss the issue in its central management committee, informally the idea has been taken up.

The RBI is using its foreign exchange reserves to arrest the fall in the domestic currency. Between September 2011 and February 2012, the central bank sold $20 billion in the spot market to arrest the rupee’s fall. The rupee has depreciated nearly 20 per cent during the past year.

The fall was triggered by the sovereign crisis in the euro zone and investors rooting for the dollar, known as a safe haven. The rupee depreciation was accentuated as India’s external position worsened, with the current account gap rising to 4.3 per cent of the GDP for the nine-month period ended December.

An attractive deposit scheme, Resurgent India Bonds, was launched in 1998 after sanctions imposed by the US over the Pokhran nuclear test. The sanctions entailed a curb on foreign exchange inflows. The programme launched by the SBI had raised $4.23 billion.

In 2000, the India Millennium Deposit scheme was launched. It offered an 8.5 per cent return to depositors and raised $5.5 billion.

Experts favour such schemes as a central bank tool to fight the decline in the domestic currency.

“Systemic concerns are already creeping in, and a breach of 2011’s rupee low of 54.30 a dollar would undermine financial and economic stability, substantially increasing investor pessimism towards India. Hence, in the face of persistent upside pressure on the dollar-rupee pair, policy makers are likely to complement the RBI’s efforts by revisiting some measures discussed last year such as a direct dollar buying window for oil companies and/or a special scheme for non-resident Indians similar to the India Millennium Deposit,” Standard Chartered Bank said in a research note.