Relaxes norms to boost inflows, checks speculation.
The Reserve Bank of India (RBI) on Wednesday announced a slew of measures to arrest the decline of the rupee, which has lost 14 per cent of its value this year and is the worst performer among Asian currencies. The regulator has also stepped up its surveillance with banks to keep a check on speculative activity by market participants.
The central bank has relaxed external commercial borrowing norms by raising the ceiling for interest rate the Indian corporate sector pays to raise overseas funds. It has also increased the interest rate cap on foreign currency deposits. Separately, the RBI removed the $100 million cap on net foreign exchange supply arising out of rupee swap transactions that banks undertake on behalf of customers. In a foreign exchange swap, a bank executes a spot and a forward transaction simultaneously for identical amounts to offset each other.
The RBI also increased the interest rate cap on non-resident (external) rupee deposits and FCNR(B) deposits. All the moves were aimed at increasing dollar liquidity in the market. Market participants also expect the RBI to open a separate window to meet the dollar demand of oil companies, which would ease pressure on the spot market. Bankers said the RBI enquired about any sizeable foreign exchange transactions and on positions banks had taken for clients.
RBI deputy governor Subir Gokarn said the central bank would intervene to smoothen the sharp movements in the rupee and prevent a downward spiral in its value, but would balance it with the need to retain reserves in the event of prolonged turbulence.
“The response is really... trying to remove sharp movements. That is the kind of technical and judgement criteria we used when we decided to intervene but that has not been with the objective of targeting a rate,” news agency Reuters reported from Paris, quoting Gokarn.
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“We need to balance out the short-term risk of an uncontrolled spiral (in the rupee) with the medium-term risk of ensuring that we have adequate reserves to deal with a potentially prolonged market turbulence,” he said. “Our approach to the rupee is going to be determined by this balancing act.”
On the ECB front, the all-in-cost ceiling over six-month LIBOR for average maturity of three and up to five years has been raised to 350 basis points from 300, while the ceiling was kept unchanged for maturity over five years at 500 bps.
According to the RBI, the ECB relaxation move was considered after a “review of the developments in the global financial markets and current macroeconomic conditions.”
Importantly, the RBI directed that funds raised abroad meant for rupee expenditure in India would have to be brought in immediately to local rupee accounts. “ECB proceeds meant only for foreign currency expenditure can be retained abroad pending utilisation,” it RBI said, adding rupee funds would not be permitted to be used for investment in capital markets, real estate or for inter-corporate lending.
“These amendments in the ECB policy will come into force immediately and the enhancement in the all-in-cost ceiling is applicable up to March 31, 2012 subject to a review thereafter,” the RBI said.
Bankers, however, said the relaxation of 50 bps may not be of much help as companies may find it difficult to raise funds within the specified ceiling as the prevailing rates were higher.
“Medium-term notes raised by banks recently raised are trading at 400 to 425 bps over the LIBOR in the secondary market. Firms may find it difficult to raise overseas funds even after the relaxation,” said a senior executive of a public sector bank.
In order to attract more flows in foreign currency deposits, the RBI raised the interest rate ceiling on Wednesday. The spreads over LIBOR rates for NRE term deposits were increased from 175 bps to 275 bps while those on FCNRB deposits were increased from 100 bps to 125 bps. “The changes in interest rates will also apply to NRE deposits renewed after their present maturity period," the RBI said in a release. These rates have been revised after a period of three years.
Dealers said RBI intervention in the foreign exchange market helped the rupee to bounce back from the day’s low of 52.57 against the dollar. The rupee settled at 52.36 on Wednesday, marginally lower compared to the previous close of 52.32.
Traders said the RBI intervened to the tune of $2.5-3 billion since the rupee touched all-time lows on Tuesday. RBI governor D Subbarao, however, declined to confirm the RBI had intervened. "I will not confirm," Subbarao said in Hyderabad when asked about an RBI intervention in the currency market on Wednesday.
Economists said RBI policy management would get complicated because of rupee depreciation. “Apart from a higher import bill, rupee depreciation is likely to complicate macro management. This would also be a drag on the fiscal situation as every Ra 1 depreciation increases the oil under-recoveries by Ra 8,000 crore,” said Rohini Malkani and Anushka Shah, economists at Citigroup Global Markets.