The RBI also capped remittances abroad by resident individuals to $75,000, down sharply from $200,000 allowed earlier under the liberalised remittance scheme. Further, Indian residents cannot invest in real estate abroad. Individual remittances abroad totalled about $3 billion during 2012-13.
To encourage banks to garner more dollars through non-resident rupee deposits and foreign currency non-resident deposits, the RBI exempted banks from maintaining the cash reserve ratio and the statutory liquidity ratio on incremental NRI deposits with a tenure of three years or more.
With the rupee has depreciated by 13% since April this year and having fallen despite measures initiated by the central bank since mid-July, economists believe that the RBI is readying long-term initiatives. The policy is not aimed at tackling any immediate situation, but should be construed as a safeguard against a more difficult situation, observed Samiran Chakraborty, MD and head of research, Standard Chartered Bank.
ODI by Indian corporates was $300 million in April-May FY14. In FY13, Indian firms invested $7.1 billion overseas, according to the RBIs August monthly bulletin. The central bank did soften the blow, saying genuine investment plans, beyond the limits imposed, could be considered under the approval route.
According to Shankar Raman, chief financial officer at Larsen & Toubro, seen from industrys perspective, this does seem like a sharp cut although some measures were expected given the depreciation of the rupee. The quantum of the cut, however, was expected to be smaller at 200% rather than to 100% and this will constrain overseas investments by Indian companies, Shankar Raman said.
The first round of measures, aimed at arresting the fall in the rupee, had tightened liquidity by limiting banks borrowings from the RBIs special window, a move that has pushed up interest rates. The yield on the benchmark bond rose to 8.49% on Wednesday, the highest in 14 months.
Neeraj Gambhir, MD and head, Fixed Income at Nomura Securities believes policy makers are now moving on to capital controls. While this may not be a full-fledged capital control since proposals will be cleared via approval, nevertheless, approvals will be hard to get and therefore, we could see a fall in outflows, Gambhir said.
For individuals, these measures could dent some essential spending such as education but the impact could be limited, bankers said. Typically, outward payments happen for reasons like higher education, international travel and import payments. But $75,000 does not sound like a very bad number, said A Surendran, head international banking and retail banking at Federal Bank.
Forex dealers said the new measures could prop up the rupee by 40-50 paise on Friday when markets re-open after the Independence Day holiday on Thursday. However, the currency would continue to be vulnerable to global events and the movement of other currencies against the dollar. We could see the dollar open around 50 paise lower on Friday. But I don't think this would impact the currency too much going ahead, said Ashutosh Raina, head of forex trading at HDFC Bank.