Buoyed by the strong build-up in foreign exchange reserves, the Reserve Bank of India on Thursday took yet another step on the road to current account liberalisation.

It raised the limits for remittance of foreign exchange by 3-20 times for various purposes, ranging from education to employment abroad.

The limits on remittance of foreign exchange have been raised by 20 times, from $5,000 to $100,000 for those going overseas for employment, for those emigrating and for the maintenance of close relatives abroad.

For those who are studying overseas, the limit has been raised from $30,000 to $100,000.

For medical treatment abroad, the foreign exchange remittance limit has been doubled to $100,000.

The limit on remittances for consultancy services procured from outside India has been raised to $1 million per project, from $ 100,000.

Banks may allow remittances for amounts up to the new limits for each category without insisting on supporting documents but on the basis of a self-declaration incorporating the basic details of the transaction and the submission of an application.

The RBI said banks could henceforth release foreign exchange up to $100,000 or its equivalent to resident Indians for medical treatment abroad, without insisting on any estimate from a hospital or doctor in India or abroad.

Hitherto, foreign exchange up to $50,000 could be released for medical treatment abroad, without insisting on any estimate from a hospital or doctor.

Banks should allow up to $1 million to be remitted for consultancy services procured from outside India subject to the applicant submitting documents to their satisfaction, it said.

The market feels that the relaxation is because of India's comfortable foreign exchange reserves of $82.774 billion. In the current financial year, some $7 billion have been added to the reserves.

NRE deposit rates capped

The RBI also capped the interest rates on fresh Non-Resident (External) rupee (NRE) deposits for 1-3 years at 250 basis points above the London Inter-Bank Offered Rate (Libor).

The move is meant to kill the arbitrage opportunities that exist on account of the relatively higher interest rates Indian banks offer on NRE deposits.

Most commercial banks now offer 5 per cent interest on NRE term deposits in the 1-3 year maturity bucket and 5.25 per cent interest on deposits of over three years.

Since the one-year Libor is now hovering around 1.2 per cent, the banks will now pay NRE deposit holders about 3.70 per cent for deposits in the 1-3 year maturity bucket. The RBI's move will effectively an arbitrage opportunity.

ICICI Bank's rate of interest on a 1-2 year NRE deposit is 5.75 per cent while that of State Bank of India is 5 per cent. In contrast, the yield on investments overseas is between 1 per cent and 2 per cent.

In fact, the NRE deposit is the most favoured instrument for non-resident Indians to park their money in India since foreign currency non-resident (bank), or FCNR(B), deposits in foreign currency do not offer such high rates.

Flows into NRE deposits have been increasing over the past few months with the outstanding deposits under this scheme at $15.789 billion at the end of April 2003.

Flows into NRE deposits in April itself increased by $966 million.

"The measure is aimed at blocking an arbitrage opportunity and is totally justified. There will also be an appropriate effect, consequently, on the flow of this money into the country," said HDFC Bank Managing Director Aditya Puri.

But S A Bhat, general manager, Bank of India, pointed out: "Banks will face a problem in the sense that Libor changes every day. So it will be better if the central bank announces the reference Libor rate every fortnight for the purpose of calculating interest payable on NRE deposits."

At present, banks can offer FCNR(B) in foreign currency and NRE deposits in domestic currency to non-resident Indians.

NRE deposits are fully repatriable. The exchange risk in NRE deposits is borne by the depositor. In FCNR(B) accounts the risk is borne by the banks.

Interest rates on FCNR(B) deposits are subject to a ceiling of Libor/Swap rates for the corresponding maturities minus 25 basis points less than 1 per cent on the deposits.