Steps taken up by RBI and Government:
The RBI and the government have taken the following steps to stabilize the currency markets, reduce the current account deficit and enhance capital inflows:
♤ Capital Outflow: The RBI reduced the limit for outbound investment and remittances from India.
♤ Encouraging Capital Inflows: RBI has removed administrative restrictions on investment schemes offered by banks to non-resident Indians, and removed ceiling on interest rates on deposit accounts held by NRIs. The government has liberalized the FDI limits for 12 sectors, including oil and gas. A Bill is pending in the Parliament to revise the FDI limit to 49% in the insurance sector. RBI increased the current overseas borrowing limit for banks from 50% to 100%, and allowed it to be converted into rupees and hedged with the RBI at concessional rate. RBI also allowed banks to swap fresh NRI dollar deposits with a minimum duration of 3 years with the RBI. Specific public sector undertakings are being permitted to issue quasi-sovereign bonds to mop up funds for the infrastructure sector. The norms for external commercial borrowings (ECBs) are also being eased to enable the oil PSUs to garner dollars for financing their import requirements.
In short, the strategy is to stimulate dollar inflows by further liberalizing external commercial borrowings (ECBs), freeing interest rates on non-resident Indian deposits, liberalizing FDI norms and directing a few public sector finance companies to mop up dollars by issuing quasi-sovereign bonds.
♤ Limiting Imports and encouraging exports: The Finance Ministry increased the customs duty on importing precious metals including gold and platinum. The strategy seeks to address supply-side issues, curbing the import of gold, silver and a few “non-essential” items. 20% of every lot of import of gold must be exclusively made available for the purpose of export.
♤ Oil Import Needs: RBI decided to provide dollar liquidity to three public sector oil- marketing companies (IOC, HPCL and BPCL) to help them meet their entire daily dollar requirements. RBI will provide dollars to oil importers through a special forex-swap window wherein oil companies will buy dollars from the central bank and, simultaneously agree to sell dollars back to RBI at a future date. Government is also considering increasing its import of crude oil from Iran, and pay for it directly in Indian rupees.
♤ Trade Deficit: Ministry of Commerce has set up a Task Force to consider currency swap arrangements for trade and explore the possibility of bypassing payment in dollars for trade and paying instead in rupees or the trading country’s currency. RBI allowed exporters and importers more flexibility in management of their forward currency contracts.
♤ Curbing Speculative in currency: RBI increased the short-term emergency borrowing rates for banks. It lifted the Marginal Standing Facility (MSF) and the Bank Rate by 200 basis points. The daily holding requirements under the Cash Reserve Ratio for banks have been modified.
