If you’re planning to invest in the shares of Apple or Microsoft on the Nasdaq or the New York Stock Exchange, you will need to downsize your investment plans. Or if you have plans to buy an apartment in Dubai, you will need to find resources locally in the Gulf region. Similarly, if you have planned to gift $2 lakh to your sister in Australia, you will have to reduce the amount drastically.
The reason? The Reserve Bank of India (RBI), which is battling to bring down the current account deficit and stabilise the rupee, has tightened the norms governing outflows. The central bank reduced the amount that a resident individual can remit outside India from $2,00,000 to $75,000 per annum under the Liberalised Remittance Scheme (LRS).
Indians remitted $1.206 billion (or Rs 7,300 crore) during the year ended March 2013 for various purposes, including investment in stocks, debt, property, travel, medical expenses, donations, maintenance of close relatives, studies abroad and gift. Of this, $261 million was accounted as gift, $231 million for investment in equity and debt for $226 million.
Indians who have been investing in mutual funds, venture funds, unrated debt securities, promissory notes, under this scheme will have to reduce their investments now. There’s less money available for medical expenses, gifts, maintenance of close relatives living abroad, donations, travel and overseas studies.
The free run of corporates to invest abroad also ended. The RBI has restricted overseas direct investment under the automatic route to 100 per cent of net worth from 400 per cent from earlier under the approval route.
Corporates who found it easier and profitable to invest abroad in the last three years had taken out $19 billion in FY 2013. The restriction can save $2-3 billion as a large number of FDI seekers will have to do a lot more paperwork.
Experts don’t think these measures will have any adverse impact on corporates or even individuals. “These are not capital controls. This is basically tightening of rules to bring stability in the external sector. There’s no adverse effect on the industry and these are temporary measures,” said NS Venkatesh, Chief General Manager & Head of Treasury, IDBI Bank.
Under the LRS, the RBI allowed residents to remit up to an amount of $200,000 a financial year for any permitted current or capital account transactions or a combination of both with effect from September 26, 2007.
The scheme was introduced in February 2004 to freely remit up to $25,000 a year. The amount was enhanced to $50,000 a financial year in December 2006, then further to $100,000 a financial year in May 2007 before enhancing it to $200,000 in September 2007.
According to a banking source, as the outflow under LRS was around $1 billion in the last three years, it’s not considered as a vulnerable area.
On the contrary, the rise in inflows by way of NRI deposits was four times from $3.2 billion in FY’11 to $14.8 billion in FY’13.
Industry chambers like Confederation of Indian Industry has termed the tightening of ODI (overseas direct investment) as retrograde and too drastic a step. Observing that outward investment by India has progressively come down from $16.5 billion in 2010-11 to $7.1 billion in 2012-13, CII president K Gopalakrishnan said, “With such a minimal amount of outflows impacted, the gains to the rupee may in fact not be as much as expected. We are deeply concerned that such a measure would also prove to be counterproductive as it would disrupt the ongoing investment plans of corporates.”
Venkatesh of IDBI Bank said corporates can directly go to the RBI for investment plans above the 100 per cent limit under the Approval Route. “The RBI has said it will consider the genuine needs of corporates under the Approval Route,” he said.
If the situation doesn’t stabilise, more measures could be in the offing. Leif Eskesen, Chief Economist for India & ASEAN, HSBC, says additional plumbing measures are likely needed, including potentially even bigger increases in fuel prices, interest surcharges on import financing, introduction of gold-linked savings instruments. In addition, it will likely prove necessary for the RBI to keep its liquidity tightening measures in place for longer, and it may even have to tighten them further if the pressures on the currency do not abate, he says.
The government and the RBI have announced a series of measures to bring stability on the external front. Will this be enough to fix the leaks? Nobody is sure. Ultimately, structural reform implementation is the solution.
Recent steps by GOVernment & RBI to stablise Re
The RBI has restricted overseas direct investment under automatic route to 100 per cent of net worth from 400 per cent under the approval route. This can save $2-3 billion as a large number of FDI seekers will have to do a lot more paperwork.
Outward remittances by resident Indians slashed to $75,000 from $2,00,000 now.
The RBI has allowed banks to pay above the domestic deposit rate (of say, 8.75 per cent) for INR-denominated nonresident Indian NRE deposits of 3+ year maturity. It hiked the cap on FCNRB deposits of 3-5 year maturity by 100 bps to 400 bps + Libor. It exempted these deposits from CRR and SLR.
The government also hopes to gain addition $1 billion in inflows from liberalizing non-resident deposit schemes
Curbing imports on oil, gold, and non-essential imports. So far, the government has announced an increase in import duties on gold, silver and platinum from 8 per cent to 10 per cent. The government also increased duties on gold/silver dore bars and gold ore/concentrate by 2 percentage points. Details on the steps to curb oil and non-essential imports have yet to be revealed. In total, the government expected to save around $ billion on the import bill from these measures
Allowing government-owned financial institutions such as IIFC, IRFC (Indian railway finance corporation) and Power Finance Corporation to issue quasi-sovereign bonds ($4 billion).
PSU oil companies can now raise external commercial borrowings (ECBs) while ECB norms have also been also further liberalise ($6 billion).