Why enrich foreigners at our cost.

The new Governor of the Reserve Bank is being hailed as the sex symbol of finance who has single-handedly raised the rupee by the scruff of its neck and set the stock markets on fire. Now he is said to be planning a " funding for lending scheme " under which the RBI will lend money to banks at 1-2% lower rates of interest for housing and auto loans. People are reluctant to take loans because uncontrolled inflation has eroded purchasing power and, with a credit downgrade creeping ever closer, they are not sure of their jobs. Petrol is at Rs 80 per liter and property prices are so high that only about 1% of people can afford to buy them. Instead of trying to entice people into higher debts the government should lower taxes but this is impossible because the Congress has committed itself to massive bribery to win the coming elections and is desperate for increased revenues. Also, with elections looming, politicians cannot afford to lose all the black money they have invested in properties. Hence this attempt to raise taxes and protect black money. Another short term measure that the RBI has already taken is to swap Foreign Currency Non-Resident deposits at a fixed rate of 3.5% which is much less than market rates. This measure will allow banks to raise dollars from NRIs at 400 basis points above Libor rates. Yesterday Libor rates on US dollars were 0.25195% for 3 months, 0.37640% for 6 months and 0.65160% for 12 months. Rates are so low because interest rate in the US is at zero percent. The RBI move allows NRIs to borrow at these low rates and get an additional 4% from Indian banks. Naturally foreign banks, such as Citi, DBS and Standard Chartered, are preparing to take advantage of this scheme. " Client equity in these deposits is just 10% and the client effectively makes between 18% and 21% on the dollars," said a banker with a European bank. Thus although this scheme is supposedly raising money from Non Resident Indians 90% of the money is coming form foreign banks who are making windfall profits at no risk at all. Apparently a similar scheme was adopted in 2000 to bring in dollars after the Asian financial crisis. So, while the government is happy to enrich foreign banks there is constant whining to reduce domestic interest rates which will hurt savers inside the country. Whose side are they on?