RBI eases rules to tame rupee3 min read . Updated: 26 Sep 2007, 12:01 AM IST
RBI eases rules to tame rupee
RBI eases rules to tame rupee
Trying to counter foreign currency inflows that have sharply strengthened the rupee against the dollar, the Reserve Bank of India (RBI) announced a series of measures that will make it easier for companies, mutual funds and individuals to invest overseas.
However, market experts were quick to suggest that these measures may not ease the pressure on the rupee, even if it could have a “feel-good" effect on companies and the steadily rising Sensex, the benchmark index of the Bombay Stock Exchange, which climbed to its fifth straight record session on Tuesday.
Over the last month, the rupee has appreciated around 2.5% to Rs39.75 against the US dollar, reaching highs not seen since May 1998. Some market experts believe that the central bank is not willing to let the rupee appreciate beyond the Rs39.50 level.
“The (RBI’s) purpose is to create a demand for dollars in order to neutralize the large inflows that are coming into the country," said Mohan Shenoy, treasury head of Kotak Mahindra Bank Ltd.
Added A.V. Rajwade, an independent foreign exchange expert: “When stock markets in our country are booming and credit windows internationally are closed, there is no reason for Indian companies to invest abroad now."
Rajwade says pressure on the rupee will continue as foreign investors keep on pouring into India, which has posted strong economic growth in recent years. “RBI could have arrested the appreciation of the rupee earlier by ample intervention," he added.
Under the more relaxed rules announced by the banking regulator on Tuesday, Indian firms can now invest up to 400% of their net worth in overseas joint ventures or their fully owned subsidiaries under the automatic route. Also, in the case of portfolio investments abroad, the existing limit of 35% of the net worth has been increased to 50%.
Further, the banking regulator has scrapped the mandatory 10% reciprocal shareholding in listed Indian companies by foreign companies for the former to make portfolio investments outside the country.
Also, in order to make it easier for corporations to prepay their external commercial borrowings (ECBs) without approval of the central bank, RBI has increased the limit of prepayment from $400 million to $500 million.
Despite the moves, business executives said the new norms are unlikely to benefit them at a time when international markets are still reeling from the US-led subprime, or risky loans, crisis. Additionally, at a time when Indian firms are in a capital expansion mode, it is unlikely they will place much stress on portfolio investments abroad. Companies that could benefit are likely to be those that are looking at leveraging their balance sheets for large mergers and acquisitions.
Said Prabal Banerji, chief financial officer of the Hinduja group: “Corporate India may not be able to avail of the full benefits of these measures due to structural reasons."
RBI increased the ceiling on overseas investments by Indian mutual funds from $4 billion to $5 billion. Also, the facility of investing up to $1 billion in overseas exchange traded funds by a limited number of qualified Indian mutual funds will continue, according to an RBI statement.
“This is a positive step in the direction of allowing investors to diversify their portfolio across the border," said Krishnamurthy Vijayan, chief executive of JPMorgan Asset Management India Pvt. Ltd. “We have already witnessed huge investor interest in the international funds from reputed mutual fund houses in India."
“Evidently, all these small steps lead to the ultimate objective of full capital convertibility," he said. “The impact of these steps will be to send money out of the system. We view this as an extremely positive step. This is a feel-good factor for the market."
“The bigger impact of this move is that it gives greater flexibility to the investors and the companies," said Mahindra Jajoo, head of fixed income at ABN Amro Asset Management (India) Pvt. Ltd.