Switzerland has added another reason for Indians to move their assets out of the country. The Swiss National Bank could soon move to impose interest rates on deposits held in Swiss banks. For black money investors, this is another bad news on top of the agreement reached between Switzerland and India to make deposits more transparent from this year, as part of a reworked tax treaty.
More than other class of investors, like those who invest in shares or bonds, deposits are the preferred choice for those who have income to hide. The rules, till now were the most opaque for this category of Indian investors, whose aggregate holdings as per data available with the Swiss National Bank is estimated at $2.5 billion.
But, with the world rushing to store their money into Swiss banks, this safe haven has had a price to pay: a strong currency. The Swissie, as the Swiss franc is now fashionably called, has appreciated more than 30% against the dollar and the euro in the last one year in the midst of the debt crises in Europe and the US. The impact of the strong currency has been felt economy-wide – on exports, earnings of domestic multinationals and could even threaten to push the country into recession.
In a bid to discourage frantic inflows, the Swiss National Bank slashed its reference rate ? the target range for the three-month Libor to 0-0.25% by 50 basis points earlier this month. Depositors will now have to pay for the privilege to park their money in Switzerland.
Not just short-term, Swiss market rates, even futures markets, have pointed to negative rates till 2013.
But analysts believe that if policy rates remain low due to global uncertainties, investors will continue to cling onto their assets in the absence of attractive alternatives.
Persistent negative interest rates or even capital controls, may spur further outflows of deposits from Switzerland. In July this year, the central bank had ruled out capital controls. Back in the 1970s, to deter inflows the central bank had charged negative interest rates on foreign inflows. But those measures were not effective in stemming the rise of the franc. Short-term rates also turned negative during the financial crisis in 2008.
As for Indian depositors, there has already been a drop in the amount of deposits held in Switzerland. Recently, in a reply to a question in Parliament, the government said that for the first time the total liabilities of Swiss banks towards Indians have declined over 50% in the last five years. According to information by the Swiss central bank, the deposits of Indians have come down from R23,000 crore in 2006 to R9,000 crore in 2010.
Walter Meier, spokesman for the Swiss National Bank, has said that Indian deposits stood at 1.95 billion Swiss francs or $2.5 billion at the end of 2010 (R1,120 crore as per current rates). This included $2.1 billion in savings and deposits by individuals, financial institutions and companies. The remaining $400 million represented deposits held by wealth managers on behalf of Indian clients.
Since 2008, some $500 million had been moved out from Swiss banks by Indians to easier jurisdictions of Dubai or Singapore. The reasons for this flight to ?safety? have been attributed to the changes in the banking secrecy policy of the Swiss government. The Swiss have been under pressure from the international community to enforce a crackdown against tax evasion.
