The Hindu : Jalan defends cap on NRE rates

Online edition of India's National Newspaper
Wednesday, Jul 23, 2003

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Business

Jalan defends cap on NRE rates

MUMBAI JULY 22 . The Governor of the Reserve Bank of India, Bimal Jalan, today said the central bank had capped the interest rates on non-resident (external) rupee (NRE) deposits to contain any possibility for arbitrage.

The RBI took the decision to cap the NRE rate to bring parity with foreign currency non-resident (bank) deposits and remove chance for arbitrage (taking benefit of interest rate differential in domestic and global market), Dr. Jalan told reporters at a function to confer "outstanding businessman of year award'' on ICICI Bank Managing Director, K. V. Kamath, here.

On July 17, the central bank capped the rate on fresh repatriable NRE deposits of one to three years at 2.5 per cent above the London Inter-Bank Offered Rate (LIBOR).

"We do recognise opportunities for arbitrage benefits but have not seen it taking place,'' Dr. Jalan said.

On the foreign exchange inflow and its management, he said, "inflows are not debt creating and there is no cost to us (RBI and Government).''

"For every dollar in reserves, the equivalent amount of rupee is released in the system, which should be used for investment,'' the governor said.

Commenting on exchange rate movements, Dr. Jalan said, "the two way movements of exchange rate are good and in-principal no one can disagree with it. But, there are no easy answers.''

"The excess volatility was not good investment and we do manage and intervene in the markets.. and generally situation is not unfavorable to us,'' he added. — PTI

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