Mumbai: In a bid to protect a depreciating rupee against the dollar, the Reserve Bank of India (RBI) on Wednesday partially rolled back the currency’s convertibility and imposed capital controls on resident Indians. The objective is to stem dollar outflow from the country at a time when the greenback is in short supply, but the decision effectively undoes key reforms of the past two decades that removed capital controls.
The rupee ended at 61.44 a dollar on Wednesday, its lowest closing in history, down 0.40% from its previous close of 61.20. The Indian currency opened at 61.47 and touched a high of 61.26 and a low of 61.60 in intra-day trade. Since January this year, the rupee has weakened 10.50% and lost the most among Asian currencies after the Japanese yen.
The currency hit a record low of 61.81 to a dollar on 6 August.
Following up on the finance ministry’s measures to attract dollars in the country, RBI said resident Indians cannot remit more than $75,000 a year, a steep rollback from $200,000 permitted earlier.
While this will not impact casual travellers and business visitors, individuals who have bought properties overseas and been paying equated monthly instalments, will be hit. Many resident Indians had bought properties overseas, particularly in South Asian countries in the aftermath of global financial crisis in 2008 as the governments of those countries wooed global investors to their domestic realty markets, offering residential status and loans from domestic banks to invest in properties priced $1 million and above.
RBI further said use of dollars under liberalised remittances scheme, under which up to $75,000 can be invested outside the country, cannot be used for buying immovable property outside India “directly or indirectly”.
A central bank release pasted on its website said any Indian company, except government-owned Navratna companies, cannot invest more than 100% of its net worth in foreign countries without taking approval of RBI. The investment limit under the so-called automatic route, for which no permission is needed, was until now 400% of a company’s net worth or equity plus reserves.
The limit will also apply to investments by Indian companies setting up unincorporated entities outside India in the energy and natural resources sectors, but this restriction will not apply the so-called Navratna public sector undertakings and ONGC Videsh Ltd.
According to the website of department of public enterprises, India has 14 Navratna companies, including firms such as Bharat Electronics Ltd, Bharat Petroleum Corp Ltd, Hindustan Aeronautics Ltd and Oil India Ltd. These firms have greater autonomy and freedom to set up subsidiaries overseas.
As part of securing India’s energy needs, the government had earlier encouraged private companies to acquire overseas metal and energy mines.
Even as the present measures will retain precious dollars onshore, this may also prove detrimental to a domestic company’s health. Taking advantage of cheaper asset prices abroad, Indian companies have stepped up their investments overseas. The limit will halt their expansion and growth plans.
According to A. Subbarao, group chief financial officer of RPG Enterprises, seeking approval from RBI will take time and the approvals “may not come at all in some cases.”
“This will have some setback for Indian companies looking to invest abroad. On the one hand, the domestic environment is not conducive for investing and, on the other, foreign investments will also become more difficult,” said Subbarao.
RBI assured that “the present set of measures is aimed at moderating outflows. However, any genuine requirement beyond these limits will continue to be considered by RBI under the approval route.”
Jayesh Mehta, head of treasury at Bank of America Merrill Lynch, said these measures will not immediately strengthen and stabilise rupee, but will help the currency market over a period of time.
“We will see the result in the exchange rate after some time. Of course, there will be some inconvenience for companies and some individuals, but this is what the country needs now,” said Mehta.
According to Mehta, the indirect message to companies is that they should invest in the domestic market and help develop the domestic exports.
As part of its efforts to reduce the current account deficit and stabilise the rupee, the government on Monday unveiled a package of measures, including proposals of quasi sovereign bonds being floated by infrastructure firms and allowing sovereign wealth funds in the country’s debt market. The government also liberalised norms for deposits by non-resident Indians.
The government also raised import duty on gold and silver. The RBI will further ban import of gold coins and medallions into the country, Arvind Mayaram, secretary, department of economic affairs, said at a press conference in Delhi.
In a related development, the RBI late evening said banks will be exempt from maintenance of cash reserve ratio (CRR) and statutory liquidity ratio (SLR) on incremental NRI deposits from 26 July and having maturity of three years and above . CRR is the portion of deposits banks need to park with RBI on which they do not earn any interest. SLR is the portion of money banks need to invest in government bonds.
Further, advances extended in India against the incremental NRI deposits qualifying for CRR and SLR exemption, will be excluded from adjusted net bank credit for computation of priority sector lending targets, RBI said. These measures are expected to encourage banks to mop up NRI deposits.
Dinesh Unnikrishnan contributed to this story.