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RBI wants companies to help it prevent rupee appreciation

RBI wants companies to help it prevent rupee appreciation
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First Published: Wed, Apr 25 2007. 12 35 AM IST

Updated: Wed, Apr 25 2007. 12 35 AM IST
Reserve Bank of India (RBI) governor Yaga Venugopal Reddy sought corporate India’s help to stem the appreciation of the rupee against the dollar, by encouraging it to spend more dollars.
In the credit policy announced on 24 April, RBI enhanced the overseas investment limit for Indian companies to three times their net worth (the previous limit was twice their net worth) and allowed them to pre-pay foreign currency loans up to $400 million (Rs1,680 crore) without RBI approval. “RBI wants to encourage outflows as it’s been under pressure to buy dollars to keep the rupee from appreciating too fast,” said Y.M. Deosthalee, chief financial officer of engineering company Larsen & Toubro Ltd. RBI hopes this will create demand for the dollar (and a consequent appreciation in its value). Currently, RBI has to purchase dollars being brought into India by foreign investors keen to invest in businesses, companies, and shares. RBI funds these purchases by printing fresh currency, which adds to the supply of money in an economy reeling from inflation that’s almost two percentage points above the central bank’s medium-term target.
“The relaxations essentially help in doing business easily as unnecessary restrictions on companies are being removed,” said K.K. Rathi, chief financial officer Pantaloon Retail (India) Ltd.
RBI has also allowed companies to take a view on where foreign exchange rates are headed by allowing them to enter into contracts to sell or purchase currencies such as the dollar up to 75% of their eligible limits (computed based on their past exports). Earlier companies could only take a view for half of their limits. “Rebooking and cancellation of forward contracts helps companies where treasury departments are profit centres as well,” said Chaitanya Deshpande, head of strategy, mergers and acquisitions and investor relations Marico Ltd.
In the credit policy, RBI has allowed small and medium enterprises to hedge foreign exchange transactions without them having existing underlying export/import contracts or a past record of such contracts.
And both metal and aviation companies have been allowed to hedge against a rise in input prices by taking positions in the currency market.
“So far, hedging has been allowed only for the exports. Now, companies will be able to hedge the risk inherent on domestic sales as well,” said R.K. Kasliwal, advisor to Hindalco Industries Ltd.
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First Published: Wed, Apr 25 2007. 12 35 AM IST