Domestic Savings and NRI Money Can Stabilise India

The fall and fall of the Indian stock indices must surely have given
the jitters to non-resident Indians who are also looking at the dismal
global scenario that has caused this. Not to worry. Among several other
home truths, Indian planners seemed to have figured out the worth of
domestic savings and NRI remittances when it comes to insulating the
economy from global tremors.

Steps are being rapidly taken so that overseas borrowing could get
easier and non-resident Indian remittances made more attractive under
a plan by the government to pump more cash to fuel growth in the economy.
The specially constituted group headed by Finance Secretary Arun Ramanathan
met last week and discussed several liquidity infusion measures including
a further cut in cash reserve ratio (CRR) and the repo rate – the rate
at which banks borrow from the central bank to meet liquidity requirements.
Quoting high level sources, the Hindustan Times reported that a rise
the interest rate on NRI deposits is also being discussed.

"If required the government and the RBI could plan something
similar to the India Millennium Deposits or the Resurgent India Bonds.
These were special deposits for non-resident Indians with returns higher
than that available elsewhere," the source was quoted as having
said. This would probably be revealed on October 24, when Reserve Bank
of India (RBI) governor D Subba Rao presents the mid-term review of
the credit policy. A possible cut in the statutory liquidity ration
(SLR) from the current 24 percent is also reportedly under consideration.

It should be clear to all that the present state of the Indian stock
indices does not faithfully reflect the strength of the economy. While
there certainly is a slow down, it is not to the extent that the bourses
have fallen. The stocks crash is to a large extent a result of the pulling
out of foreign institutional investment (FII) from the Indian financial
markets. FIIs have sold about $10bn or about 13 percent of the total
investments they have made in India. It will take time for the FIIs
to invest once gain into the Indian markets. However, if one takes a
look at the economy, even a down-graded 6.5 to seven percent growth
project for the coming year, compares well with the 2-3 percent global
growth estimate.

That is to say, India remains a good place to invest and this is probably
a very good time to do it. There is credence to the point when Federal
Bank CEO & MD, M Venugopal said on the recent Gulf tour: "I
will ask NRIs to take advantage of the current situation of high exchange
rates and interest rates." Indian banks are seen at a safer position
during the current global financial crisis due to their "insignificant"
exposure to the US markets. These banks also did not have a large presence
of structured products, which were responsible for the crisis in the
West. Venugopalan suggested that it was advisable to invest in non-resident
ordinary (NRO) deposits or relatives’ domestic deposits as rates are
higher now. NRO deposits of less than one year yield an annual interest
of 10.6 percent and those of less than three years fetch 10.5 percent
while non-resident external (NRE) savings deposits earn only a little
over four percent.

Sanjay Jindal, president of India’s Associated Chamber of Commerce
and Industry (Assocham) has suggested the removal of the cap on interest
rate for NRI deposits. NRIs and PIOs in the US and other western nations
are already sending more money home as a result of the severe crisis
there. The depreciation of rupee and rising rate of interest for fixed
deposits in foreign currency have made NRI deposits attractive. The
Times of India reported that in recent weeks, many US-based NRIs have
switched their funds from US based entities to Indian banks by way of
NRI deposits. For instance, SBI in Gujarat, which had mopped up NRI
deposits worth Rs290 crore in the last five months, has collected over
Rs 50 crore in September alone.

In a recent interview on CNBC-TV18, Uday Kotak, Vice-Chairman and Managing
Director of Kotak Mahindra Bank, said he expected the current global
pain to remain for the next three-five years, particularly, in the United
States (US), Europe and Japan. He strongly felt that India has to stop
depending on global flows because global economies themselves are in
a problem, and said the country should instead rely more on its domestic
savings and domestic ability to build its economy.

Asked about whether removing limits on NRI deposits would help, he
said: "At this point of time, every overseas Indian is scared about
his money with any global financial institution. At a time like this,
when Indian financial institutions and banks in particular are in such
good shape in general, we can actually attract an enormous amount of
overseas Indians’ money into India. He is looking for safety."
He said India should take this as "one huge opportunity to track
significant NRI flows into our economy on the basis that we are a much
sounder economy than probably any other economy in the world at this
point." He suggested that the current rules on FCNR (foreign currency
non-resident) deposits should be liberalised in terms of the kind of
spread over Libor (London inter-bank offered rate), which banks can
pay.