Friday, November 17, 2006: An internal study by the Reserve Bank of India is understood to have found out that most of the foreign exchange inflows into India from non-residents.

Indians (NRIs) and portfolio investments are emanating from tax-haven countries.

The study further aims at trailing the origin of the funds to the tax-haven countries. The findings are part of the overall study by the RBI to track the origin and utility of funds flowing into the country under the broad umbrella of foreign direct investment (FDI).

According to banking sources, the study indicates the fact that the origin of funds is doubtful. Moreover, these are short-term investments being channelled to the Indian capital markets to earn capital gains exemption and not for any productive purpose. In fact, some of the NRI inflows have also been used as portfolio investments for investing in the capital market.

Sources added that the study has been triggered by the stance taken by the RBI that the portfolio investments in the Indian capital market made through the unregistered route of participatory notes and hedge funds should be banned.

According to the RBI, the origin of these funds could not be traced and poses concern on account of money-laundering.

However, the government is of the view that participatory notes could be continued and, to this effect, the capital market regulator — the Securities and Exchange Board of India (SEBI) is working out stiff disclosure norms.

RBI has been sticking to its stance that such unregistered route should be terminated, as there is a well-defined registered route of foreign institutional investment already existing.

NRE rupee deposits, a component of ‘deposits and loans’, continued to hold major share at 32.7 per cent in the total international liabilities as at end-March 2006.

As per the data released by the RBI, international liabilities of banks in India, increased by $3,162 million over the position in the previous quarter and stood at $52,319 million as on end-March 2006.

These included FCNR(B) deposits, NR(E)R deposits, foreign currency borrowings, bonds, FII deposits, etc. India’s external debt increased from $123,204 million as at end-March 2005 to $ 125,181 million as at end-March 2006, although the debt had declined to $ 119,192 million as on end-December 2005.

Source - http://www.business-standard.com