Mumbai: The Reserve Bank of India (RBI) has started talking against liberalization of outflows in the short term as this “attracts higher inflows and may not be of great help”.
RBI governor Y.V. Reddy said so on Friday while speaking at a symposium on “Globalization, Inflation and Monetary Policy” in Paris. This is significant because the Indian central bank has recently taken a series of steps to liberalize outflows of foreign currency.
In the current global environment, the central bank is of the opinion that there is a need to judge whether the capital inflows “are large and lumpy and temporary in nature”, Reddy said.
RBI also believes there is a need to examine the “desirable extant of sterilization, considering costs and available instruments,” he added.
RBI has been sterilizing the dollar flow by buying them from the market. For every dollar it buys, it releases an equal amount of rupee liquidity into the system. At the second stage, this liquidity is absorbed through bonds floated under the Market Stabilization Scheme (MSS) of the government. The bonds of MSS are outside the government’s annual borrowing programme, under which securities are auctioned to bridge the government’s annual fiscal deficit.
Cash management: RBI governor Y.V. Reddy. The central bank is of the opinion that there is need to judge whether the capital inflows ‘are large and lumpy and temporary in nature’.
During April-28 December, liquidity absorbed under MSS was Rs96,742 crore.
RBI had announced a series of measures in 2007 to enable Indian companies, mutual funds and individuals to invest overseas. Indian corporations were allowed to invest up to 400% of their net worth in overseas joint ventures or fully owned subsidiaries from the earlier existing limit of 200%. They were also allowed to make portfolio investments outside India of up to 50% of their net worth, from the earlier existing limit of 35%.
The banking regulator also scrapped the 10% reciprocal shareholding in listed Indian companies by foreign companies for the former to make portfolio investments outside the country. Besides, in order to make it easier for corporations to prepay external commercial borrowings without approval of the central bank, RBI increased the limit of prepayment from $400 million to $500 million.
For mutual funds, RBI increased the ceiling on overseas investments from $4 billion to $5 billion. The central bank also doubled the overseas remittance limit for resident individuals to $200,000 from $100,000.
Though RBI is unlikely to recall any of the liberalizing moves it took last year, banking industry experts say the central bank will not make any further move to encourage outflow of foreign currency.
Said A.V. Rajwade, independent foreign exchange expert, “The liberalizing moves that RBI had made six months back have not yielded any results. However, the market having corrected significantly since then, the central bank may not have to take any further measures to encourage capital outflows.”