BackRBI eases forex rules to defend currency
Steps to help diversify sources of forex funding, says central bank
PremiumMUMBAI : The Reserve Bank of India announced a series of steps to boost foreign exchange inflows to arrest the rupeeās slide against the dollar.
The measures include doubling the annual overseas borrowing limits for companies to $1.5 billion and temporarily abolishing interest-rate caps for banks to attract deposits from non-resident Indians, RBI said in a statement on Wednesday.
The central bank also eased rules for foreign investors to invest in government and corporate debt in India.
The rupee has come under severe pressure, hitting a series of lows in the past weeks, as foreign portfolio investors pulled out their investments from India, and the countryās trade gap progressively widened to a record in June because of rising import costs of crude, gold and other commodities.
Economists have estimated Indiaās current account deficit, a broad measure of the countryās trade and financial flows with other nations, to widen to more than 3% of GDP this fiscal, nearly double that of the previous year.
RBI said the latest steps would help diversify and expand the sources of forex funding and reduce currency volatility. āWhile the current account deficit remains modest, capital flows, barring portfolio investments, remain stable, and an adequate level of reserves provides a buffer against external shocks. The rupee has depreciated by 4.1% against the dollar during the current fiscal (up to 5 July), which is modest relative to other EMEs (emerging market economies) and even major advanced economies," RBI said. Indiaās forex reserves stood at $593.3 billion as of 24 June.
Currency traders expect the latest announcements to support the rupee, which they earlier expected to slide to 80 against the dollar as early as this month.
āThe markets were expecting the rupee to touch 80 in no time, but thatās not going to happen. The rupee should benefit from these announcements," said Paresh Nayar, head of forex and fixed income, First Rand Bank.
Among other steps RBI took to attract foreign flows, it exempted banks from maintaining cash reserve ratio and statutory liquidity ratio on incremental foreign currency and rupee-denominated term deposits raised from non-resident Indians between 1 July and 4 November. In addition, RBI removed the ceiling on interest rates on these deposits between 7 July and 31 October.
Currently, foreign currency deposits maturing in 1-3 years are priced at 250 basis points over the so-called alternate reference rate, while deposits of 3-5 year maturity are priced at 350 basis points above the reference rate. Bankers said these relaxations will not only reduce the cost of funds for banks but will also allow non-residents to get better returns, attracting foreign funds to the domestic banking system.
āThe measures are fundamentally good to attract capital, in our view, but may take some time to have an impact as the pressure on the rupee is primarily coming from the large sticky current account deficit, not just capital outflows. Also, the governmentās previously announced additional export taxes on oil and petroleum products, increased import duty on gold and levy on domestic oil production should help improve sentiment, but the fundamental pressure on the foreign exchange may persist for some time, perhaps until there is a material correction in commodity prices," said Rahul Bajoria, chief India economist, Barclays Bank.
Easing foreign portfolio investment (FPI) norms, RBI allowed new issuances of 7-year and 14-year government securities under the fully accessible route (FAR). Currently, only 5-year, 10-year and 30-year G-secs are designated under FAR. FPI investment in bonds under FAR has no limits, unlike other securities.
RBI also relaxed norms on residual maturity for FPI investments in government and corporate debt. Investments by FPIs in such bonds made till 31 October are exempt from a short-term limit, according to which not more than 30% of investments can have a residual maturity of less than one year. The central bank also provided a window till 31 October for FPIs to buy money market instruments such as commercial papers with an original maturity of up to one year.
āInvestor demand may rise for treasury bills, commercial paper, and bonds maturing up to one year, though the supply of CPs and short-term bonds has been muted. This would mean yields on Treasury bills may come down. Short-term rates have increased sharply in the recent monthās post repo rate hikes and the market pricing in future repo hikes. Todayās RBI initiative may help bring down yields in the short term if it attracts FPIs and other investor segments," said Venkatakrishnan Srinivasan, founder of Rockfort Fincap.
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