Rupee strengthening with strong inflows from NRIs news
20 December 2008

The rupee strengthened more than 2.8 per cent this week to 47.08 per dollar. The currency has rebounded more than 7 per cent since reaching a record low of 50.615 on 2 December.

India's rupee had seen a third weekly advance and reached the highest in 2 1/2 months yesterday.  FIIs have bought more Indian shares than they sold since  December, set for the first month of net purchases since April, data on average daily trading from SEBI shows.

The US currency has weakened against most currencies, including the euro, and dropped 1.5 per cent to $1.4639 to a euro from $1.4419. Most Asian currencies have also strengthened against the dollar.

In addition, demand for dollars in the Indian markets has eased as imports are seen to have slowed down due to lower demand due to the economic slowdown. Many manufacturing sectors, including automobiles, consumer durables, cement and steel, have cut down production due to lower demand in the domestic and international markets.

Further, oil companies, which were heavily buying foreign currency in the local markets, have scaled down their purchase due to a fall in crude oil prices from a peak of $147 a barrel to around $45 a barrel.

NRIs pump the economy
Foreign currency deposit inflows into the domestic banking system have begun exerting upward pressure on the rupee-dollar exchange rates.

The inflows had accelerated during the last week after some of the international banks cut certificates of deposit rates, responding to Federal Reserve Board rate reductions. The flows were mostly from non- resident Indians based out of the US and Europe.

The surge in deposits was also largely due the lower interest rates on offer by the international banks. After this week's reduction in the Federal Funds target rate to 0.25 per cent, one year US certificate of deposit rates have slumped to about 1.9 per cent. In October this year, CD rates averaged 4.4 per cent. Higher rates in India offer arbitrage opportunities.

ICICI Bank, the country's largest private bank, a major player in the remittance segment, has reported a growth of 38.2 per cent during the second quarter of FY09 to Rs11,946 crore ($2.5 billion) compared with a year ago. The bank expects to end the year with a 40 per cent growth in business.

Currently domestic banks are offering rates as high as 3.77 per cent. For non-repatriable rupee deposits, the rates on offer was 4.60 per cent.

The better offering from domestic banks has also been prompting a large shift by NRIs to Foreign Currency Non resident accounts or to the higher earning non-repatriable rupee account deposits.

Between April and October this year, the deposit inflows were about $1 billion, as against $75 million redemption during the corresponding period of the last financial year. Outstanding Non-resident deposits in October this year amounted to about $39 billion. But, the inflows during the last few weeks had pushed up the deposits in excess of $40 billion.

Unlike NRI deposits that are repatriable, remittances are permanent one-time transfer by NRIs, generally to their relatives back home. Reflected in private transfers in the balance of payments, this figure also includes donations and gold in the individual baggage, among others.

Remittances cannot be repatriated by rule and are meant for use by families. But there is a provision for locals to gift up to $200,000 annually to relatives abroad.


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Rupee strengthening with strong inflows from NRIs