After tightening interest rates on repatriable non-resident external rupee (NRE) deposits and dollar deposits (FCNR-B) to kill arbitrage opportunities between the international and domestic markets, the Reserve Bank of India may now tighten the norms for non-resident Indians' investments in mutual funds.
According to banking industry sources, the central bank is seriously looking into the issue.
"This is the only avenue left where arbitrage opportunities still exist. The RBI is planning to plug any loopholes that exist," a banking industry source said. The RBI is comfortable with trade inflows but wants to restrict the capital flows.
At present, NRIs as well as foreign institutional investors are allowed to invest in mutual funds both on a repatriable as well as on a non-repatriable basis. NRIs are required to use money in their NRE and FCNR(B) accounts to invest on a repatriable basis.
They can also take the inward remittance route to invest in mutual funds.
"It is clearly known that the RBI wants to put a cap on NRI money flows into the mutual funds sector. The central bank may put some restrictions for a limited period and watch their impact," said a banking source.
Mutual fund industry sources, however, said there had not been a huge NRI money flow into the sector.
The RBI has continuously been putting restrictions on NRI remittances so as to push up the quality of foreign exchange assets and check the flow of hot money.
In September this year, the RBI capped the interest rates on repatriable NRE deposits at 100 basis points above the London Inter-Bank Offered Rate (Libor)/Swap rates for the dollar of corresponding maturity.
The move has put NRE and FCNR-B deposits on a par and killed arbitrage opportunities.
Earlier in July, the RBI had imposed a ceiling on interest rates on repatriable NRE deposits. Then the central bank said banks could not pay more than 250 basis points above the Libor/Swap rates for dollar of corresponding maturity.
It had also brought down the interest rates on FCNR(B) deposits.
Capital curb
- The RBI is likely to put some restrictions on NRI investments in MFs for a limited period.
- The apex bank is comfortable with trade inflows but wants to restrict capital flows.
- It has continuously put restrictions on NRI remittances to raise the quality of India's foreign exchange assets.
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