August 15, 2013
MUMBAI/NEW DELHI: The Reserve Bank of India on Wednesday rolled out the big guns in a bid to protect the rupee. It tightened the limit for how much individuals and companies can invest abroad without seeking permission and banned the import of gold coins and medallions.
RBI on Wednesday announced several measures to protect the rupee.
August 15, 2013
MUMBAI/NEW DELHI: The Reserve Bank of India on Wednesday rolled out the big guns in a bid to protect the rupee. It tightened the limit for how much individuals and companies can invest abroad without seeking permission and banned the import of gold coins and medallions.
RBI on Wednesday announced several measures to protect the rupee.
Companies will now have to seek RBI permission if they want to invest any amount beyond their net worth abroad. Investment in oil and gas exploration and those by navratna PSUs are the sole exception to the new rule. So far, companies were allowed to invest up to four times their net worth (which includes reserves and profit). Indian firms had invested over $7 billion overseas in 2012-13.
Similarly, for individuals, the annual cap on automatic outflows has been slashed from $200,000 (over Rs 1.20 crore at current exchange rate) to $75,000 (around Rs 45 lakh). Besides, there is now a ban on overseas real estate purchases. At $1.2 billion during the last financial year, outflows under this route, known as the Liberalized Remittance Scheme, were a tiny fraction of money going out of the country, finance ministry officials said the move was meant to signal that the government is serious about preventing a free fall of the rupee.
Some analysts, however, read the signal quite differently as an indication of panic and of a return of capital controls. "While the authorities aim to reduce 'FX (forex) volatility', we fear that they may end up sending a panic signal," Nomura India economist Sonal Varma said in a research note.
This prompted finance minister P Chidambaram to step in and clarify that the measures were temporary and were not to be interpreted as capital controls. "I want to make it clear that these are not capital controls. There is no intention to go back to capital controls," Chidambaram told television channels. He also said that RBI had only reduced the flexibility available under the so-called automatic route. Companies were not being discouraged from acquiring assets abroad, he insisted.
The measures came as the rupee fell to an all time closing low of 61.43 against the dollar – 24 paise down from Tuesday's close of 61.19. In overseas markets, such as Singapore's non-deliverable forwards market, traders are betting that the rupee will inch close to 63 against the dollar in three months. Economic affairs secretary Arvind Mayaram said the government will take further steps, if necessary.
"The measures were needed as markets had built up an expectation that RBI would take further steps after it announced import restrictions on gold," said Harihar Krishnamoorthy, Head of Treasury Operations, FirstRand Bank.
The restrictions come even as RBI has announced measures to boost dollar inflows which have been hit in recent months. FIIs have been withdrawing from the Indian markets and NRI deposits too have dipped. Latest data released by RBI showed that inflows into NRI deposits fell
by over 16% to $5.5 billion during April-June 2013, compared to around $6.6 billion a year ago. The total stock of deposits depleted by over $600 million during June.
The $200,000 limit for individual remittances was set in September 2007 when dollar inflows posed a problem of plenty. The ban on real estate remittances will hurt Indians who have made part payment for property overseas as curbs come into effect immediately.
Bankers said that measures were much needed as overseas direct investment by Indians was sizeable and was resulting in flight of capital with little benefits to the economy. Also Indians were turning out to be big buyers of foreign property. According to a report by real estate consulting firm Jones Lang LaSalle, Dubai, Singapore, Malaysia, New York, Dubai and suburbs of London are destinations where Indians are buying property.
To encourage dollar inflows, RBI has allowed banks to offer higher returns on non-resident deposits with a tenure of three-years. Interest on foreign currency (non-resident) – FCNR deposits – is now capped at 400 basis points above the London inter-bank offered rate (Libor) as against 300 basis points earlier. Further banks will not have to block a portion of NRI deposits with RBI under cash reserve ratio (CRR) or statutory liquidity ratio (SLR) this will allow them to offer up to one percentage point higher on non-resident deposits. To encourage banks fresh loans against these deposits will not be subject to priority sector norms.
The most severe capital controls were imposed by RBI during the 1991 balance of payments crisis when importers were required to maintain 200% margin for dollar purchases. Subsequently after the Asian Currency Crisis in 1998, RBI had introduced some level of controls. Although since then RBI has stated full capital account convertibility as a goal, post-crisis RBI decided that controls were necessary at times. "Before the crisis, the consensus was that capital controls are bad, always and everywhere. That consensus no longer holds. Received wisdom today is that capital controls are not only appropriate, but even desirable, in certain circumstances," D Subbarao had said in his IMF speech in April this year.
Courtesy: PTI
