The monetary policy statement indicates that the central bank is expecting copious inflow into the country in the form of foreign portfolio investment. Some of the measures announced in the policy appear targeted towards controlling a run-away appreciation in the rupee as a result of these inflows.
The rupee has appreciated around 3 per cent since the beginning of this year against the dollar. This has happened in a very turbulent environment where the dollar has been soaring higher and the euro has been crashing. The primary reason for the appreciation is strong foreign portfolio flows into Indian debt so far this year, due to the attractive real yield of Indian G-secs.
The RBI is however not too happy with an appreciating rupee as it tends to affect export realisations that in turn hurts the current account deficit. This was reflected in the policy that said, “Export performance has been hamstrung by weak global demand conditions and the persisting fall in unit value realisations. The real appreciation of the rupee may also have had some effect.”
With the European Central Bank and the Bank of Japan unleashing fresh rounds of liquidity in to financial markets that can inflate asset prices further, the RBI appears set to counter these flows, with few small measures.
Overseas forex remittances
The foremost is the doubling of the foreign exchange remittances under the Liberalised Remittance Scheme to $ 250,000 per person per year. It may be recalled that the limit was reduced to $75,000 in 2013 to curb rupee depreciation.
Allowing foreign portfolio investors to invest only in corporate bonds with residual maturity of at least three years could result in some short-term FPIs staying away from Indian market, thus reducing the pull in the USD-INR pair.
Allowing foreign direct investments to invest in the country with “an assured return at an appropriate discount over the sovereign yield curve through an embedded optionality clause” is targeted at addressing the demands of investors who wished to have a suitable exit clause in their deals. It is not certain if foreign investors will be enthused by this tweak. But it seems to imply that the central bank is comfortable allowing some foreign money to move out of the country.