11 steps to beleguered Indian rupee's redemption

Aug 29 2013, 15:55 IST
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The steps are the latest in a series of extraordinary measures by the RBI to combat a currency fall. Reuters The steps are the latest in a series of extraordinary measures by the RBI to combat a currency fall. Reuters
SummaryThe steps are the latest in a series of extraordinary measures by the RBI to combat a currency fall.

The Indian rupee rebounded on Thursday from a record low after the Reserve Bank of India (RBI) said it will provide dollars directly to state oil companies in its latest attempt to shore up the currency.

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The steps are the latest in a series of extraordinary measures by the Reserve Bank of India to combat a currency fall of more than 20 percent this year, by far the biggest decline among the Asian currencies tracked by Reuters.

However, analysts said the RBI measures alone would not lead to a sustained recovery unless the government can pass measures that can convince markets of its willingness to tackle India's fiscal and current account deficits and slowing growth.

Following is a set of measures announced by Indian authorities:

DOLLARS FOR STATE OIL REFINERS

The RBI announced late on Wednesday a special window to sell dollars through a designated bank to Indian Oil Corp Ltd , Hindustan Petroleum Corp and Bharat Petroleum Corp.

The move will remove $400 million to $500 million of daily demand from the spot market. Oil is India's largest import item and state refiners are the biggest buyers of dollars in the foreign exchange market.

GOLD

The government is looking to contain gold imports at 850 tonnes this fiscal year, compared with 950 tonnes last year. Finance Minister P. Chidambaram said this would lower the import bill by $4 billion.

- New Delhi raised the import duty on gold for the third time in eight months to 10 percent from 8 percent.

- It also raised the factory gate duty on gold bars to 9 percent from 7 percent.

- It banned imports of gold coins and medallions.

- All imports of gold now need a licence from the foreign trade office and would have to be brought into a customs-bonded warehouse.

- Unrefined gold will now be included under an existing rule stipulating that 20 percent of all imports must be used for exports, which is usually in the form of jewellery.

SILVER

The government is also targeting imports of silver, which are a tiny fraction of gold.

- It has raised the import tax on silver to 10 percent from 6 percent.

OIL FROM IRAN

The government is aiming to cut the oil import bill by $1.5 billion this fiscal year. It is also looking for ways to boost oil imports from Iran, which will result in dollar savings.

SOVEREIGN WEALTH FUNDS

Sovereign wealth funds (SWFs) will be allowed to invest in tax-free bonds floated by state-run infrastructure finance companies. The government has earmarked 30 percent of these bonds specifically for investment by SWFs.

QUASI-SOVEREIGN BONDS

Indian Railway Finance Corp Ltd (IRFC), Power Finance Corp (PFC) and India Infrastructure Finance Co Ltd (IIFCL) will raise $4 billion from overseas via quasi-sovereign bonds to finance long-term infrastructure. IRFC will raise $1 billion. PFC and IIFCL will raise $1.5 billion each.

IMPORT RESTRICTIONS

The government aims to reduce imports of non-essential import items such as fridges and TVs. Chidambaram expects some dollar savings from these tariff restrictions. However, he is yet to act upon the plan, and there are some concerns they could run afoul of WTO agreements.

OVERSEAS CORPORATE BORROWING

India has relaxed guidelines on borrowing by companies from overseas money markets, known as external commercial borrowing. Chidambaram says the relaxed guidelines will likely bring in extra $2 billion this fiscal year.

- Under the new guidelines, subsidiaries of multi-national companies in India will be allowed to raise money from their parent companies.

- Maintenance, repair, and operations facilities will be deemed a part of airport infrastructure.

- The government is talking to a number of private sector companies which have plans to raise money abroad.

OIL COMPANY FINANCE

State-run oil companies will raise additional funds from offshore money markets and trade finance. This will fetch an extra $4 billion. Indian Oil Corp will raise $1.7 billion. Bharat Petroleum and Hindustan Petroleum will raise $1 billion each. An additional $250 million will come from trade finance.

NON-RESIDENT INDIAN DEPOSITS

India has liberalised deposit schemes for non-resident Indians (NRIs). Chidambaram says this will likely bring in $1 billion.

- Under the new guidelines, incremental flows of deposits into Non-Resident Rupee Account Scheme (NRE)/Foreign Currency Account Scheme (FCNR) will be exempt from cash reserve ratio and statutory liquidity ratio requirements.

- In NRE deposits, the interest rate will be deregulated on deposits with maturity of 3 years or more, while in FCNR (B) deposits of 3-5 years, the ceiling has been relaxed to LIBOR plus 400 bps from 300 bps.

HIGHER FDI LIMITS

India has raised the cap on foreign direct investment in asset reconstruction companies to 74 percent from 49 percent, to help attract capital inflows to support a sagging rupee.

FOREIGN EXCHANGE OUTFLOWS

The RBI has announced measures to reduce foreign exchange outflows by resident Indians.

- It has cut the limit for overseas direct investments (ODI) under the automatic route for all new transactions to 100 percent of net worth from 400 percent.

- The reduced limit would also apply to remittances made by Indian companies setting up unincorporated entities outside of the country in the energy and natural resources sectors, but would not apply to ONGC Videsh Ltd, the foreign unit of Oil and Natural Gas Corp, or Oil India Ltd.

- The RBI has also reduced the limit for remittances made by resident individuals under the liberalised remittance scheme to $75,000 from $200,000 per financial year.

- It has banned use of remittances for purchases of property outside India.

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