Private Overseas Transfers At Record $10bn In 1996-97

Private transfers from abroad topped a record $10 billion in 1996-97, according to the latest data made available by the government.

Private transfer receipts thus continued their upward trend, rising from $6.2 billion in 1994-95 and $7.5 billion in 1995-96. This continued buoyancy contributed to a robust outlook on the balance of payments.

Since private transfer receipts form an important component of invisibles, the performance of this segment too has improved vastly. With the trade deficit turning out to be much lower than anticipated, the current account deficit for 1996-97 is now being projected at 1 per cent of gross domestic product ($3.5 billion) compared with the initial estimate of 1.4 per cent ($5 billion).

 

Foreign capital inflows showed a marked turnaround towards the latter half of the year, comfortably exceeding initial expectations. While $3.5 billion would have been sufficient to finance the current account deficit, the inflows were substantially higher. Last year's accruals amounted to approximately $3.5-3.7 billion under foreign currency non-resident (FCNR) deposits, $1.2 billion from Euro-issues and $2.5 billion by way of portfolio investments.

An additional reason for the record buoyancy in 1996-97 was the fact that a substantial part of the $2.2 billion India Development Bonds were not redeemed and instead accrued as private transfers. These bonds, which were floated in 1991, were due for redemption in two tranches in mid-January and mid-February.

The spurt in foreign inflows forced the Reserve Bank of India to step in and absorb the surplus dollars, sending foreign exchange reserves surging by $5.2 billion in 1996-97. Analysts estimate that a failure to absorb the inflow could have pushed up the value of the rupee against the dollar from the current level of Rs 35.70 to as high as Rs 33.

However, officials predict a deceleration in private transfer receipts from abroad this year. They argue that the buoyancy in recent years has been the outcome of the introduction of full convertibility of the rupee on the current account. This has made the unofficial trade in foreign exchange (or hawala) unprofitable, since the difference between the official and hawala rates is now down to about 10 per cent.

Further, the government has also relaxed the import of gold, resulting in a larger share of these imports being effected through official channels. It is not worthwhile for the hawala trader to undertake the risk at a margin of only 10 per cent, pointed out officials.