RBI announces measures to fight rupee depreciation

RBI announces measures to fight rupee depreciation

Firms to park ECB funds in India, currency swap hedging limits raised

It has also liberalised currency swap hedging limits for companies. “The proceeds of the ECB raised abroad for Rupee expenditure in India... should be brought immediately for credit to Rupee accounts with AD Category I banks,” the Reserve Bank said in a notification. Such funds could be used for local sourcing of capital goods, on-lending to Self-Help Groups or for micro credit and payment for spectrum allocation, among other purposes.

The modifications in the norms for external commercial borrowing (ECBs) was done after a review of the developments in the global financial markets and current macro-economic conditions. The directives have been made effective from Wednesday, the RBI said.
It, however, said that ECBs meant for foreign currency expenditure can be retained abroad pending utilisation.

The depreciation in rupee, which slumped to an all time low of 52.73 on Tuesday, has become a cause of concern for policy makers as the slide is affecting capital market and fueling inflation. The central bank said “as hitherto, however, the rupee funds will not be permitted to be used for investment in capital markets, real estate or for inter-corporate lending.”

As the cost of credit is significantly less in overseas markets, Indian companies have borrowed close to US$29 billion in foreign currencies, through ECBs and FCCBs, so far in 2011, as against US$18 billion in 2010. The RBI has also enhanced the ‘all-in-costs ceiling’, which include rate of interest, fees and expenses, for raising funds through ECBs.

However, the rate remain same for those with average maturity of above five years. In another move announced on Wednesday, RBI revised guidelines on foreign exchange derivative contracts, removing the cap of US$100 million net limit by a bank on swap transactions.

The move will help companies to increase net supply of foreign currency.
“On a review, it has been decided to remove the above limit of US$100 million placed for these swap transactions,” the RBI said in a notification. As per the guidelines issued in 2010, swap transactions by banks acting as intermediaries were allowed by matching the requirements of corporate counter-parties.

While no limit was placed for undertaking swaps to facilitate customers to hedge their foreign exchange exposures, a “limit of US$100 million was placed for net supply of foreign exchange in the market on account of swaps which facilitate customers to assume foreign currency liability”.

This means each bank had to observe a net limit of US$ 100 million when exposure of all such swaps are combined.

According to experts, the move is intended to allow banks to sell more currency swaps to companies with overseas debt at a time when the currency market is highly volatile.