The Reserve Bank of India announced a slew of policy measures on Thursday to prop up the weakening rupee. It said 50 per cent of the balances held by exporters in exchange earners' foreign currency (EEFC) accounts should be converted into rupee balances and credited to their rupee accounts. The conversion process has to be completed within a fortnight.
In respect of all future forex earnings, a foreign exchange earner will be eligible to retain 50 per cent (previous limit: 100 per cent) in non-interest bearing EEFC accounts. The other 50 per cent has to be converted into rupee balances.
Last week, the RBI took measures to raise the interest rate ceiling on foreign currency non-resident deposits to ease foreign currency flows and support the rupee.
The central bank's latest policy measures came as the Indian currency closed at a four-month low of 53.84 to the dollar on Wednesday. The rupee has been weakening since August 2011.
Factors responsible
Factors such as (high) current account deficit, foreign institutional investor outflows, given the uncertainty on implementation of General Anti-Avoidance Rules and the euro's weakness due to political instability in Greece and leadership changes in France are impacting the rupee, said a report by India Forex Advisors.
The rupee appreciated to close at 53.43 on Thursday as exporters are expected to bring back half the balances parked in their EEFC accounts.
It is estimated that of the $5 billion held in EEFC accounts, $2.5 billion will flow into the Indian foreign exchange market, leading to the rupee strengthening in the near term.
According to Mr N.S. Venkatesh, Chief General Manager & Head, Treasury, IDBI Bank, besides dollar inflows from EEFC accounts, there will also be inflows from resident foreign currency (RFC) accounts and diamond dollar accounts (DDA). The balances in RFC and DDA are estimated at around $1 billion and $2 billion, respectively. As 50 per cent of the balances will have to be repatriated from these accounts also, dollar liquidity will further increase by $1.5 billion, said Mr Venkatesh.
To prevent currency speculation, the RBI said EEFC account holders will be permitted to access the forex market for purchasing foreign exchange only after utilising fully the available balances in their EEFC accounts.
“Exporters were holding back their receivables on expectation that the rupee would depreciate further. Some were taking advantage of the difference in the rupee-dollar parity in the domestic and overseas markets,” said a forex dealer.
The RBI said the EEFC scheme is intended to enable exchange-earners save on conversion/transaction costs while undertaking forex transactions in future. This facility is not intended to enable-exchange earners to maintain assets in foreign currency, as India is still not fully convertible on capital account.
Exporters unhappy
Mr M. Rafeeque Ahmed, President, Federation of Indian Export Organisations, said the RBI's move will severely curtail the flexibility enjoyed by exporters for making payments for imports, particularly for sectors with over 50 per cent import intensity, such as gems and jewellery, petroleum, electronic goods, plastic products and chemicals.
He suggested that the cap on retained export earnings in EEFC accounts should be restored to 100 per cent for the petroleum and gem and jewellery sectors and raised to 75 per cent for other sectors.