 "RBI goes all out on rupee, CAD")
In a move to save the battered rupee, the Reserve Bank of India (RBI) on Wednesday reversed the trend of relaxing capital controls by limiting the amount Indian companies could invest abroad and the money citizens could remit abroad. The steps are expected to affect the plans of several business houses, such as the Aditya Birla Group, Apollo Tyres and Cipla, which had laid out big plans to invest abroad.
“The measures are aimed at moderating forex outflows. However, any genuine requirement beyond these limits will continue to be considered under the approval route,” RBI said.
In a parallel move to boost inflows, RBI deregulated the interest rate offered by banks to non-resident Indians (NRIs). Till now, banks were not allowed to pay higher rates for non-resident (external) rupee (NRE) deposits than those for the resident ones.
“Banks are free to offer interest rates without any ceiling on NRE deposits with maturities of three years and above,” RBI said, adding banks would not have to maintain cash reserve ratio (CRR) or statutory liquidity ratio (SLR) for any incremental NRE and foreign currency non-resident FCNR (B) accounts. The interest ceiling for FCNR (B) deposits, for three- to five-year maturities, has been raised 100 basis points to Libor plus 400 bps.
The instructions on interest rates would be valid up to November 30, subject to review, RBI said.
The move, however, is unlikely to have any immediate effect, as bankers say they are in no a hurry to increase the deposit rate for want of a deployment opportunity.
Despite a weakening rupee, the flow into NRI deposits fell by $1 billion in the April-June period this year — from $6.5 billion last year to $5.5 billion. According to RBI data, outstanding NRI deposits stood at $71.07 billion as at the end of June 2013.
“At present, banks are able to raise short-term money in foreign currencies from overseas markets at Libor +120 bps to 150 bps. FCNR deposit rates are already higher than that. So, I don’t think banks will be keen to raise the rates,” a senior executive of a private bank said.
On the measures to curb outflows, RBI said Indian companies could invest abroad through the automatic route only the amounts equal to their net worth — as against 400 per cent currently. This lowered limit would also apply on remittances made by Indian companies under the overseas direct investment (ODI) scheme to set up unincorporated entities outside the country in the energy & natural resources sectors, RBI said. Individuals have, however, now been allowed to set up joint ventures/wholly-owned subsidiaries outside India under the ODI route within the revised liberalised remittances scheme (LRS) limit. However, this reduction in limit would not apply to navratna PSUs, ONGC Videsh and Oil India for unincorporated and incorporated entities abroad.
In the first four months of the current financial year, foreign direct investments by Indian companies have come down from those in the same period last year. In June 2013, India Inc’s overseas investments almost halved to $261 million from that in the month last year.
Outward remittances under LRS have also fallen in the past three months.
An RBI statement also said resident individuals had been barred from using remittances for purchase of property outside India. The limit for remittances under LRS was also lowered from $200,000 per financial year to $75,000.
Economic Affairs Secretary Arvind Mayaram said the government would step in with more measures, as and when required. “Today’s measures are not permanent in nature. The government and RBI would revisit these when the rupee starts stabilising. We are reviewing the possibility of making different kinds of instruments available to the investors,” he said.
“All these steps, though small, will help reduce the high current account deficit (CAD),” said Jayesh Mehta, managing director and country treasurer, Bank of America.
Experts said the measures would help the rupee bounce back on Friday. The currency on Wednesday depreciated 0.4 per cent against the dollar to close at 61.44 a dollar — an all-time closing low. The previous closing low was 61.30, seen on August 7.
CAD hit a record high of 4.8 per cent of GDP last financial year and has weighed on the currency, which has weakened 13.2 per cent against the dollar so far this financial year. For three years in a row, CAD was above RBI’s comfort zone of 2.5 per cent of GDP.
“The liberalisation was done at a time when India had a surfeit of capital flows. Given that the circumstances have changed, it does make sense to bring in these restrictions. These measures will improve sentiments for the rupee,” said G Ananth Narayan, head of global markets (South Asia), Standard Chartered Bank. “But, in the medium to long term, we still require steps on CAD and growth, to improve long-term flows,” he added.
The volatile currency has halted the monetary-easing steps of RBI, which has kept the repo rate unchanged for two straight policy meetings after lowering it 75 basis points in 2013. The rupee’s weakness has started fuelling inflation, too, as the country imports oil and gold heavily. The rate of wholesale inflation in July rose from June’s 4.86 per cent to 5.79 per cent — above RBI’s comfort zone of four-five per cent.
“RBI has been trying to attract foreign currency flows into the country. When that has not happened to the desired level, the other side of the coin is to arrest outflows. This step may not help the rupee. When a three per cent hike in interest rates did not help the rupee, how will this help? These steps will only delay the currency’s weakening to the 63-65-a-dollar level. These moves do not provide a comfort or confidence for a rupee rally to 57 a dollar,” J Moses Harding, executive director & chief business officer, Lakshmi Vilas Bank, said.
The central bank has taken several measures to tighten liquidity in the money market but those have failed to stem the weakness of the currency, which has slipped to touch fresh lows. All TO SUPPORT THE RUPEE
Encouraging inflows
Ceiling on NRE deposit rate removed
Ceiling on FCNR (B) deposit rate raised for 3-5-year maturities
Banks will not have to maintain CRR/SLR on incremental NRE/FCNR (B) deposits of 3-5-year maturities
Discouraging outflows
Automatic-route approval for foreign investment lowered to 100% of firms’ net worth; Navratna PSUs exempted
Remittances for individuals capped at $75,000 a year
Immovable property purchase through liberalised remittance scheme outside India stopped
“The measures are aimed at moderating forex outflows. However, any genuine requirement beyond these limits will continue to be considered under the approval route,” RBI said.
In a parallel move to boost inflows, RBI deregulated the interest rate offered by banks to non-resident Indians (NRIs). Till now, banks were not allowed to pay higher rates for non-resident (external) rupee (NRE) deposits than those for the resident ones.
“Banks are free to offer interest rates without any ceiling on NRE deposits with maturities of three years and above,” RBI said, adding banks would not have to maintain cash reserve ratio (CRR) or statutory liquidity ratio (SLR) for any incremental NRE and foreign currency non-resident FCNR (B) accounts. The interest ceiling for FCNR (B) deposits, for three- to five-year maturities, has been raised 100 basis points to Libor plus 400 bps.
The instructions on interest rates would be valid up to November 30, subject to review, RBI said.
The move, however, is unlikely to have any immediate effect, as bankers say they are in no a hurry to increase the deposit rate for want of a deployment opportunity.
Despite a weakening rupee, the flow into NRI deposits fell by $1 billion in the April-June period this year — from $6.5 billion last year to $5.5 billion. According to RBI data, outstanding NRI deposits stood at $71.07 billion as at the end of June 2013.
“At present, banks are able to raise short-term money in foreign currencies from overseas markets at Libor +120 bps to 150 bps. FCNR deposit rates are already higher than that. So, I don’t think banks will be keen to raise the rates,” a senior executive of a private bank said.
On the measures to curb outflows, RBI said Indian companies could invest abroad through the automatic route only the amounts equal to their net worth — as against 400 per cent currently. This lowered limit would also apply on remittances made by Indian companies under the overseas direct investment (ODI) scheme to set up unincorporated entities outside the country in the energy & natural resources sectors, RBI said. Individuals have, however, now been allowed to set up joint ventures/wholly-owned subsidiaries outside India under the ODI route within the revised liberalised remittances scheme (LRS) limit. However, this reduction in limit would not apply to navratna PSUs, ONGC Videsh and Oil India for unincorporated and incorporated entities abroad.
In the first four months of the current financial year, foreign direct investments by Indian companies have come down from those in the same period last year. In June 2013, India Inc’s overseas investments almost halved to $261 million from that in the month last year.
Outward remittances under LRS have also fallen in the past three months.
An RBI statement also said resident individuals had been barred from using remittances for purchase of property outside India. The limit for remittances under LRS was also lowered from $200,000 per financial year to $75,000.
Economic Affairs Secretary Arvind Mayaram said the government would step in with more measures, as and when required. “Today’s measures are not permanent in nature. The government and RBI would revisit these when the rupee starts stabilising. We are reviewing the possibility of making different kinds of instruments available to the investors,” he said.
“All these steps, though small, will help reduce the high current account deficit (CAD),” said Jayesh Mehta, managing director and country treasurer, Bank of America.
Experts said the measures would help the rupee bounce back on Friday. The currency on Wednesday depreciated 0.4 per cent against the dollar to close at 61.44 a dollar — an all-time closing low. The previous closing low was 61.30, seen on August 7.
CAD hit a record high of 4.8 per cent of GDP last financial year and has weighed on the currency, which has weakened 13.2 per cent against the dollar so far this financial year. For three years in a row, CAD was above RBI’s comfort zone of 2.5 per cent of GDP.
“The liberalisation was done at a time when India had a surfeit of capital flows. Given that the circumstances have changed, it does make sense to bring in these restrictions. These measures will improve sentiments for the rupee,” said G Ananth Narayan, head of global markets (South Asia), Standard Chartered Bank. “But, in the medium to long term, we still require steps on CAD and growth, to improve long-term flows,” he added.
The volatile currency has halted the monetary-easing steps of RBI, which has kept the repo rate unchanged for two straight policy meetings after lowering it 75 basis points in 2013. The rupee’s weakness has started fuelling inflation, too, as the country imports oil and gold heavily. The rate of wholesale inflation in July rose from June’s 4.86 per cent to 5.79 per cent — above RBI’s comfort zone of four-five per cent.
“RBI has been trying to attract foreign currency flows into the country. When that has not happened to the desired level, the other side of the coin is to arrest outflows. This step may not help the rupee. When a three per cent hike in interest rates did not help the rupee, how will this help? These steps will only delay the currency’s weakening to the 63-65-a-dollar level. These moves do not provide a comfort or confidence for a rupee rally to 57 a dollar,” J Moses Harding, executive director & chief business officer, Lakshmi Vilas Bank, said.
The central bank has taken several measures to tighten liquidity in the money market but those have failed to stem the weakness of the currency, which has slipped to touch fresh lows. All TO SUPPORT THE RUPEE
Encouraging inflows
Ceiling on NRE deposit rate removed
Ceiling on FCNR (B) deposit rate raised for 3-5-year maturities
Banks will not have to maintain CRR/SLR on incremental NRE/FCNR (B) deposits of 3-5-year maturities
Discouraging outflows
Automatic-route approval for foreign investment lowered to 100% of firms’ net worth; Navratna PSUs exempted
Remittances for individuals capped at $75,000 a year
Immovable property purchase through liberalised remittance scheme outside India stopped