The rupee continued to weaken against the US dollar on Thursday, falling to a low of 54.60 per dollar as concerns over global economic growth drew investors towards the US currency. The Indian currency, however, recovered to end at 53.64 to the dollar, up from 53.72 on Wednesday, after the Reserve Bank of India (RBI) started selling dollars. A marginal recovery for the euro against the dollar contributed to the rupee’s recovery. Since August, the rupee has depreciated 16.6%, the most among Asian currencies. After market hours, RBI announced a series of measures to rein in speculation and stem the rupee’s depreciation.
What the government and RBI have done so far
• The government has raised the ceiling for investments by foreign investors in corporate and government bonds by $5 billion in each category, taking the overall foreign investment limit in the debt market to $60 billion.
• The central bank has also raised the interest rate ceiling on foreign currency
loans to 350 basis points (bps) above the six-month London interbank offered rate (Libor) for overseas loans maturing in three-five years, making it easier for companies to borrow from abroad. Libor is the average interest rate that leading banks in London charge when lending to other banks. A basis point is one-hundredth of a percentage point.
• RBI has also made it mandatory for companies to bring the money immediately into the country, if raised for rupee expenditure in India.
• It has also hiked interest rates on non-resident rupee deposits between one and three years to 275 bps above Libor—up from 175 bps—rate that had remained unchanged since 15 November 2008. Interest on foreign currency deposits in Indian banks has also been increased to Libor plus 125 bps from Libor plus 100 bps.
• Once cancelled, forward contracts booked to hedge current account transactions cannot be rebooked.
• Foreign institutional investors (FIIs), too, cannot rebook forward contracts cancelled, but can roll over.
• All forward contracts booked by exporters and importers will be on a fully deliverable basis.
• The overnight open dollar position limit of banks has been cut.
What else RBI and government can do?
• Moses Harding, executive vice-president and head of the global markets
group at IndusInd Bank, said RBI can deregulate non-resident Indian deposit rates in the long run and lift the cap on banks’ offshore limits. The cap is now 50% of a bank’s net worth, which RBI can lift and let them access dollars from overseas. This will ease domestic liquidity as well.
• To encourage inflows from non-resident Indians, RBI can lift the cap on interest payments on non-resident external (NRE) accounts. This now has the Libor/swap as the reference rate.
Being a rupee deposit account, it can have domestic rates. Persons residing abroad of Indian nationality or origin are entitled to open NRE accounts in rupees. These accounts are maintained in the form of savings, current or term deposits.
Other form of NRI deposits include foreign currency non-resident bank (FCNR-B) account and non-resident ordinary (NRO) accounts. According to the latest RBI figures, outstanding in various NRI accounts was $51.6 billion in March 2011. Provisional figures by RBI show the figure may have risen to close to $52 billion in October.
• Ashish Vaidya, head of fixed income and commodity trading at UBS, said RBI can provide a special mechanism to take away genuine dollar demand from the market. “It can provide a window for oil companies to buy dollars, which could depress demand, besides selling dollars (itself) to increase supply,” he added. RBI can also ask exporters to bring in earnings more quickly than within 180 days as mandated now.
• The central bank can also force exporters to bring export proceeds back to the country faster. Normally, exporters keep dollars overseas when the local currency depreciates to earn more in rupees per dollar.
• RBI can also enter swap arrangements with the central banks of other countries.
Impact of rupee depreciation
• It will make oil more expensive in rupee terms.
• All imports will cost more and this will fuel inflation.
• Exporters will gain because they can earn more rupees for their foreign currency receipts.
• It will make foreign travel dearer and particular hit Indian students studying abroad.
• The decline in the rupee will generate only a moderate impact on rated Indian companies, with the country’s largest oil refining and marketing company, Indian Oil Corp., facing the biggest challenges, Moody’s Investor Services said in a note on Wednesday. “While the currency’s fall will increase the debt-servicing costs of companies with foreign currency debt, the risks for those holding large amounts of US dollar-denominated debt are also manageable in the near term, given that debt maturities are limited for this time frame,” Moody’s stated.
• The recent fall in the value of the Indian rupee is likely to support the profits of about 70% of the companies that we rate in India. Nevertheless leverage will not improve for most companies, according to a Standard and Poor’s report published on Thursday.
Graphics by Yogesh Kumar/Mint