Exporters told to convert 50% of holdings into rupee

The Reserve Bank of India (RBI), on Thursday, stepped in the market once again by taking some severe measures to stem the slide in the rupee, after it witnessed the worst closing at 53.85 against US dollar a day earlier.

In effect, RBI announced two norms to curb the slide asking the exchange earners to convert 50 per cent of their dollar holdings into rupee, which is likely to boost the demand for the currency as compared to the dollar. Secondly, the apex bank has now set the intra-day open position limit for the banks at five times the Net Overnight Open Position Limit available to them or the existing Intra-day open position limit as approved by it, whichever is higher.

The latest RBI move makes it mandatory for exporters to sell the dollars in the market after meeting their import requirements, travel requirements, instead of holding the dollars in the EEFC accounts. This allows EEFC accounts to be used purely for the transaction purposes and not for the hedging purpose.

Currently, the amount held in the Exchange Earner’s Foreign Currency (EEFC) accounts is estimated at US$5 billion and as per the new norms US$2.5 billion will have to be converted in rupees. In a circular issued, RBI said this process will have to be completed within the next 15 days.

Further, RBI also said as far as the future earnings in Forex are concerned, the same rule would apply, wherein the exchange earner will have to retain 50 per cent of the earnings in EEFC account and the balance 50 per cent will be converted into rupee.

RBI concedes that the amount coming into the markets by way of conversion of dollars into rupees will not be too large, but it will certainly ensure that the exporters are not misusing the facilities given in the EEFC schemes, and they don’t keep on buying dollars in spite of having the balance in their EEFC account.

The RBI circular made it clear saying, “The facility of EEFC scheme is intended to enable exchange earners to save on conversion or transaction costs while undertaking forex transactions in future... not intended to enable exchange earners to maintain assets in foreign currency, as India is still not fully convertible on capital account.” As long as the second norm of RBI is concerned, by setting the intraday open position limit, the central bank will ensure that there is sufficient liquidity in the market while at the same time tightening the norms for exporters.

Though these measures are capable of strengthening the rupee against US dollar for a while, it will not help rupee much in the long term, as the market sentiment is still weak for rupee on the back of the Macro Economic Factors, says India Forex Advisors.

Reacting to the RBI’s diktat to exporters, the rupee this day settled at Rs 53.44/45 to the dollar as compared with Wednesday’s close of 53.85. In fact, the rupee is still within sight of a record low of 54.30 hit in December. Needless to say that rupee has been caught in a maelstrom of domestic factors, including a widening current account deficit.