The central banks move is aimed at reducing, if not altogether closing out, the arbitrage gap. Over the last 10 months, the authorities have in four stages brought the ceiling to its present Libor-only level from a Libor plus 250 basis points position.
Related is the move to bar non-banking finance companies from accepting such deposits. So will all this temper such inflows Well, it is somewhat premature to comment on this, but for the week ended April 9, 2004, the forex kitty swelled by $3.4 billion to $116.06 bn, surpassing the $2.6 bn for the week ended October 10, 2003. And for week ended April 16, 2004, it went up by an incremental $1.53 bn to $117.59 bn.
We will know of the impact of the RBI move only when the latest weekly numbers for end-April come in.
However, the inter-bank market provides cues in this regard. The rupee breached the 44 per dollar mark last week to end at 44.03/04 per dollar a whopping 17 paise decline from the preceding weekends levels of 43.87/89, but a smart rally from lows of 44.22/24 was struck in early deals on Friday.
The decline is due to heavy dollar demand amidst a cash-dollar shortage caused by the central banks dollar purchases.
The periodic rallies are attributed to both exporter-dollar sales and offloading of huge overbought-dollar positions by banks ahead of a long holiday weekend as also the RBIs surrogate dollar sales via state-run banks.
Also remember, the rupee has risen by nearly four per cent in the current calendar year so far after a gain of 5.32 per cent in 2003. And that means the current volatile situation will persist.
In the futures market, the forward-dollar continues to trade in discounts to the spot-rate amidst rising concerns of a cash-dollar shortage in the system.
This clearly indicates that as long as the current dollar deluge continues, there is no way that the present situation will alter. NRI deposits is just one component of dollar inflows. There are foreign institutional investor inflows to contend with.
These will continue given that the India story is one the biggest going around. In the last financial year, these topped $7.5 bn. The bigger picture is that sterilisation is becoming a headache.
There is already talk that bonds to be issued under the market stabilisation scheme will be hiked from its first quarter limit of Rs 60,000 crore.
The extent of liquidity overhang in the system is phenomenal: Rs 76,730 crore (as on 22 April 2004) going by the outstanding amount under the liquidity adjustment facility. Perhaps, there is a case for reducing the NRI ceiling from at-Libor to less-Libor!