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RBI Takes Steps To Ease Foreign Currency Inflows

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The Reserve Bank of India (RBI) on Friday announced measures to augment foreign currency inflows, following a sharp fall in the rupee in recent sessions, although traders said the moves may not be enough to stem further near-term weakness.

The rupee is down about 9 per cent since March and saw precipitous falls in the last three sessions before recovering its daily losses on Friday. The RBI is believed to have stepped in to the market to defend the currency on Wednesday and Thursday, and possibly Friday, traders said.

The currency is down 2.3 per cent for the week, closing at 53.47/48 to the dollar, putting it close to the record 54.30 plumbed in December, with traders blaming worry about the India's current account and fiscal deficits as well as new tax proposals.

"Maybe some foreign fund inflows will be augmented because of this step, but I don't think it is enough to stop the downward fall of the rupee," said Ashtosh Raina, head of foreign currency trading at HDFC Bank.

"I think the RBI is trying to address the issue step by step, and this is the first move," he said, adding that the rupee was likely to remain in the 53-54 range.

The RBI relaxed the interest rate ceiling on foreign currency non-resident (FCNR) deposits of banks with maturities of 1 year to less than 3 years to 200 basis points above the LIBOR or swap rate, from 125 basis points now.

On 3 to 5-year maturity FCNR deposits, the rate ceiling will be relaxed to 300 basis points above LIBOR.

The central bank also allowed banks to freely determine the interest rates on export credit in foreign currency.

The measures, announced after the close of markets on Friday, will be effective from Saturday.

Another trader, who declined to be identified, said the moves may improve sentiment but not translate into further near-term flows as the measures will take time to have an effect.

Net portfolio outflows stood at around $540 million over the last two months compared with $13 billion in inflows in January-February.

Rupee Rebounds; RBI Intervention Debated
The rupee staged a late recovery on Friday that sparked debate about Reserve Bank intervention, but is still within reach of a lifetime low after posting a fifth successive week of falls on rising fears of foreign outflows.

The rupee, already reeling under the impact of a widening capital account deficit, a slowing economy, and fears about policy reforms, is also being undone by uncertainty about taxation of foreign investors.

The falls in the rupee have put markets on heightened alert about intervention, after the Reserve Bank of India was seen selling dollars in the previous two sessions.

The local unit recovered most of the day's losses in afternoon trading on Friday, but views were split about whether the central bank had again stepped in.

Dealers said the evidence was not clear cut, pointing to dollar sales of about $200 million from a large engineering company at around 53.80/85 levels late in the session.

"It seems that RBI came in to supply the market at around 53.65 levels. But the rupee's recovery was largely due to squaring off of positions by foreign banks ahead of U.S. non-farm payrolls and selling by a large corporate," said the chief dealer with a foreign bank.

The rupee settled at 53.47/48 after falling to as low as 53.95 in intraday trade. It had closed at 52.96/97 on Thursday.

The currency remained on the back foot for most of the session after India said it would review its tax treaty with Mauritius, sending the BSE Sensex down 1.8 percent given most of the foreign portfolio investment is routed through the small island country.

Next week could prove important given the finance ministry will submit to parliament the controversial bill containing the taxation proposals.

The outlook for the rupee remains weak, with traders largely expecting the currency to touch the record lows of around 54.30 hit in December.

India's limited foreign exchange reserves and its acute liquidity deficit means the country may not be able to defend the rupee for long.

"INR remains in the doghouse and continues to be a touch-me-not due to the adverse balance of payments," Rajeev Malik, senior economist at CLSA, wrote in a report.

The one-month offshore non-deliverable forward contracts were at 53.81.

In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all ended around 53.77 on a total volume of $5.6 billion.

(Reuters)


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