With the markets responding favourably to newly-appointed Reserve Bank of India Governor Raghuram Rajan’s initial moves to loosen some of the curbs placed on the rupee, the Government may roll back other measures put in place by the apex bank, as well as capital markets regulator, Securities and Exchange Board of India, for curbing volatility in the foreign exchange market.
RE RECOVERS SHARPLY
“The two regulators, RBI and SEBI took measures to bring stability in the foreign exchange market. Now there is some improvement. So, you can see undoing (winding down) of the measures,” a senior Government official told Business Line. The rupee has recovered strongly over the past two days, wiping out 162 paise of the losses it has suffered against the USdollar. On Thursday, the rupee ended at Rs 66.01 a dollar, up by 106 paise.
The rupee has seen a fall of over 20 per cent in the current year, with a 14-per cent fall in just August. Since the Government felt that excessive speculation, apart from fundamental economic factors, were driving this steep fall, SEBI stepped in, curtailing position limits and increasing margin requirements for currency derivatives on July 8. This was followed by a numbers of measures by the RBI in July to bring stability.
Following the measures put in place in August to curb speculation, the RBI announced measures to moderate foreign exchange outflow. These measures included reducing the limit of overseas direct investment by companies under the automatic route and remittance by individuals.
GREEN IN MIND
The market read these steps as a return to capital controls and reacted negatively. Though the Centre and the RBI tried to ally such fears, the impression is yet to fully fade from the minds of investors.
The official said Rajan’s positive stance on Wednesday, accompanied by further reform measures, such as the passage of the Pension Bill, which had been pending for eight years, and the final approval of a longpending $1.6-billion pharmaceutical FDI proposal, will help improve sentiments. However, curbs on liquidity had some impact on the currency derivatives market, he pointed out. “Combine with this, the winding up of the curbs will have a dual impact — stability in the market and positive signal for investors,” the official added.
Analysts also believe that Rajan’s first-day measures will help augment forex flows. Apart from clarifying on overseas direct investments by Indian companies, the RBI also announced the opening of a swap window to attract Foreign Currency Non-Resident (FCNR-B) dollar funds. The RBI has also allowed banks to borrow overseas an additional 50 per cent of their net worth and swap that for rupees with the RBI at 1 per cent lower than the swap rate prevailing in the market.
In its research report, Morgan Stanely said, “Currently, $15 billion is outstanding under the FCNR deposits. We believe, with this measure, an additional $5-10 billion could be raised. Moreover, some additional dollar flows could be raised by banks borrowing overseas.”