India Millennium Deposit Scheme

The India Millennium Deposit (IMD) Scheme, operated by the State Bank of India got under way on October 21. Through this scheme, which is targeted at the overseas Indians, the SBI expects to collect over $5 billion. Let us take a look at the salient features of this issue and the reasons behind introducing the Scheme.

 

IMDs represent foreign currency deposits in India and are denominated in US dollars, Pound Sterling and Euro. The Scheme has been launched in all countries where local regulations allow SBI to implement IMD program within the timeframe of the deposit scheme. For the same reason, SBI has decided to skip the NRI community in the US as clearances from the Federal Reserve Bank as well as from the individual state governments might take a long time and these approvals may not reach the bank in time for the deposit program. Accordingly, the Scheme is open for NRIs and Overseas Corporate Bodies who are not residing in USA.The IMDs have a term of 5 years and the interest payment will be made in the currency in which the IMD is denominated. The income from the deposit certificates is exempt from Income Tax in India and is also free from Wealth Tax and Gift Tax. Loans (in Indian rupees) can also be obtained against collateral of the deposit certificates, subject to the guidelines issued by the Reserve Bank of India. 

The main reason behind SBI floating the multi-billion dollar deposit issue is to boost the foreign exchange reserves of the country and support the rupee. The foreign exchange reserves have gone down in 2000 owing to rising global oil prices and slowing foreign capital inflows. Oil prices have hit ten-year highs and are expected to stay that way if the political tensions in the Middle East worsen. This led the Indian oil import bill to jump up by 91.65% to $6.90 billion. However, the funds raised through the IMD program, expected to be at least $2 billion, would not be sufficient to meet the increased oil import bill. For the rupee, which has lost more than 6% against the dollar since January, the deposit scheme is likely to bring only temporary relief. Against this backdrop, the cost of raising the funds and their deployment is also raising doubts. The SBI and other banks collecting the funds are supposed to earn their spreads by funding infrastructure projects. Considering that the IMD Scheme has a term of 5 years and most infrastructure projects have long gestation periods there is bound to be a time mismatch risk. Also there are not many infrastructure projects that are waiting to be financed. 

Both the Government and the SBI have failed to address many other valid concerns regarding the IMD Scheme such as the effect of exchange rate fluctuations. Ultimately the amount of funds mobilised by the Scheme should not be the sole criterion to measure the success of the IMD program.