Stressing that there are dangers of excessive short-term debt in fast-changing global scenario, a Reserve Bank of India-constituted internal group has recommended that interest income from NRI deposits may be taxed like domestic deposits consistent with current account convertibility.

Interest on Non-Resident External (NRE) term deposits may also be changed to London Inter-Bank Offered Rate of corresponding maturity, the internal group on External Liabilities of Scheduled Commercial Banks said in its report to the central bank.

In the recent past, there have been attempts to reduce India's external debt by prepayment but NRI deposits have been a major source of increase in external debt in this period.

The group is of the view that in the fast-changing global scenario, there are dangers of excessive short-term debt and its share in overall external debt should be low.

The off-balance sheet exposures of banks in terms of foreign currency are restricted with safeguards on quantum of such exposures and are not likely to raise any systemic problem, it said.

NRI deposit schemes were given tax benefits in the past to attract foreign exchange funds in the times of pressing Balance of Payments requirements. However, over the years, NRI deposit inflows have become much larger and there is no need to give such benefits on these deposits in light of the comfortable forex reserves.

RBI's internal group was also of the view that India is not exposed to any risk of dollarisation for the present.

All foreign currency accounts that are allowed to residents for transaction purpose should be non-interest bearing so that risk of dollarisation is under check, it said in the report released for seeking public comments.

The Resident Foreign Currency (RFC) scheme may be made non-interest bearing. The EEFC and RFC(D) accounts should continue to remain non-interest bearing, the group added.

The group recommended that reserve and liquidity requirements (CRR and SLR) on NRI deposits might be left unaltered for the present.

NRI savings deposits interest rate may be delinked from domestic savings deposit rate and may have the ceiling of one-month LIBOR or SWAP rates on US dollar deposits.

Non-Resident Ordinary (NRO) deposits may have the nature of current or savings accounts only. The existing NRO term or recurring deposits might be allowed to be maintained till maturity, it added.

The group said, for better availability of export credit in foreign currency, the present ceiling on interest on such credit may be deregulated. If complete deregulation was not considered feasible, the interest rate ceiling may be raised by 0.5 per cent to LIBOR plus 1.25 per cent to ensure greater availability of export credit in foreign currency.

As indicated in the annual policy statement for 2004-05, on the basis of these recommendations, the RBI has implemented several measures, it said.

The interest rates on NRE term deposits for one to three years were reduced to LIBOR/SWAP rates for US dollar of corresponding maturity, effective April 17, 2004.

The ceiling on interest rate on NRE savings deposits was fixed at six-month US dollar LIBOR/SWAP rate; and no lien on these accounts, direct or indirect, would be permitted.

Entities other than authorised dealers or authorized banks have been disallowed, effective April 24, 2004, from accepting fresh deposits from Non-Resident Indians, received either through fresh inward remittances or by debit to their NRE/Foreign Currency Non-Resident (Banks) (FCNR-B) accounts, it pointed out.