RBI panel favours freer rupee for trade

A Reserve Bank of India (RBI) task force on capital account convertibility is considering a string of procedural relaxations in foreign trade payments.

Some of the major recommendations the task force is studying include easing rules for writing off dollar proceeds not received by exporters, raising the limits for booking forward contracts and extending the current account facility to exchange earners' foreign currency accounts.

The limit for booking forward contracts is now 25 per cent of a company's export turnover in the previous year.

The task force is also considering either phasing out or tightening the import-linked short-term loan facility for importers because it helps in skirting external commercial borrowing norms.

The task force, constituted on September 1, is expected to finalise its recommendations in the first week of December. Some of these relaxations could be part of the mid-term monetary policy review scheduled for October 31, 2006.

The task force's terms of reference include a review of the existing regulations that straddle the current and capital accounts, examination of existing repatriation/surrender requirements in the context of current account convertibility and management of the capital account and identification of areas where streamlining and simplification of procedures is possible.

While there is a proposal to allow exporters to offer exchange earners' foreign currency as collateral for margins, letter of credit or guarantees, the RBI is not inclined to give the account an interest-bearing deposit facility because of its possible impact on domestic interest rates.

All policy-related recommendations might take time because the group was considering macro-economic implications in detail, banking sources said.

The task force is not in favour of relaxing the end use of external commercial borrowing proceeds or raising the limit under the automatic route.

However, it is of the view that rupee-denominated foreign borrowings could be kept outside the total ceiling. The exemption may come with a rider that the borrowings should be raised in dollars overseas and swapped into rupees in India with the lenders bearing the foreign exchange risk.

On the issue of multilateral agencies being allowed to raise rupee bonds, the task force's view is that the rupee debt raised by multilateral agencies for lending in India should not be routed through banks and the credit risk should be borne entirely by these agencies.

Usually, multilateral agencies raise rupee debt and fund banks for onlending, thereby passing the borrower risk to the bank.

The task force feels that non-corporates like proprietary and partnership firms should be allowed to invest abroad like their corporate counterparts, but under strict anti-money laundering regulations.

It does not appear to be in favour of hiking the limit for corporate outward investment from 200 per cent to 400 per cent of their net worth since this will lead to a net outflow of capital from the country.

Similarly, there is concern about increasing the limit and relaxing the norms for individual investment overseas. It may lead to dollarisation of the economy as Indian residents may resort to settling of debt and other dues in dollars.