The Reserve Bank of India on Monday said it would allow companies to borrow
more from overseas to pay back their high cost rupee loans. The central bank has
also allowed new category of investors like sovereign wealth funds, pension
funds, insurance funds and foreign central banks to buy Indian government
bonds.
External Commercial Borrowings limit has been lifted to $40bn from $ 30bn earlier. This would be to repay outstanding rupee loans of Indian businesses. This comes as a relief to the manufacturing sector. The rupee loans are expensive while foreign currency loans are cheaper. In addition, manufacturing and infrastructure companies -- as well as those that have foreign exchange earnings -- can now avail of ECBs of up to $ 10 billion to repay rupee loans invested in capex, or for fresh rupee capital expenditure.
The RBI’s measures were part of a package to halt the slide in the rupee and to prop up a sagging economy. However, the markets were clearly unimpressed with the central bank's efforts: the Bombay Stock Exchange's benchmark Sensex fell below 17,000 mark shortly after the announcement. The Sensex closed 0.53 per cent lower at 16,882.16. The rupee gave up gains to fall to 56.94 at 2:38 p.m. after having hit 56.40 earlier in the day. The rupee has lost over 25 per cent in the last one year.
"The market was expecting a slew of measures. The measures announced now won't have any direct material bearing on the rupee. Unless the RBI comes in with more measures, the rupee will fall back to the 57-58 to a dollar levels," said M Natarajan, head of Treasury at the Bank of Nova Scotia in Mumbai.
As part its efforts to reduce currency volatility and infuse more liquidity into the system, the central bank also raised the limit on foreign institutional investor (FII) investment in government securities in India by $ 5 billion to $20 billion.
The RBI has decided to widen the non-resident investor base to include sovereign wealth funds, pension funds and insurance funds in government securities with a limit of $ 20bn. This is in-addition to raising the FII investment limit by $ 5bn. However, these new entities will need to be registered with capital markets regulator Securities and Exchane Board of India.
(Also read: Government, RBI announce steps to boost economy: 10 developments)
Qualified Foreign Investors (QFIs) can now invest in those mutual fund (MF) schemes that hold at least 25 per cent of their assets (either in debt or in equity or both) in the infrastructure sector under the current USD 3 billion sub-limit for investment in mutual funds related to infrastructure
Earlier, outgoing Finance Minister Pranab Mukherjee said the RBI would shortly issue a circular announcing steps the government was taking to arrest declining growth, and that he had had discussions with RBI deputy governor Subir Gokarn. Mr. Mukherjee will resign on Tuesday to run for President.
On Sunday, Mr Mukherjee had said that the government and the Reserve Bank of India would take steps to halt the fall in the rupee and improve market conditions. He said that the government had discussed the rupee’s depreciation with the central bank governor on Friday.
The Indian currency has fallen 10.92 per cent since the beginning of the current fiscal and hit an all-time low of 57.33 against the dollar in June 22. The economy has slowed to 6.5 per cent for fiscal 2012, while inflation has risen to 7.5 per cent in May. Earlier this month, the central bank defied calls for a cut in interest rates, choosing instead to keep the policy rate unchanged at 8.0 per cent and the cash reserve ratio at 4.75 per cent.
Industry had been hoping that the central bank would relax the limit on external commercial borrowings. The earlier cap was at 350 and 500 basis points over the existing London interbank rate, for loans of up to 3 years and more than 5 years, respectively.
The existing NRE rate is 9 per cent-plus, while the Foreign Currency Non-Resident (FCNR) rates are LIBOR + 200 basis points and LIBOR plus 300 basis points for the 1-3 year and 3-5 year longevity, respectively.
Market analysts had expected RBI to announce an increase in interest rates for deposits of Non-Resident Indians.
They also expected that the government would announce a bond issue to attract inflows. “RBI may increase the interest rate on FCNR(B) deposit further and announce the issuance of bonds for Non-Resident Indians to address the issues in the short-term,” Crisil Chief Economist D K Joshi had said.
In 1998, India had launched the ‘Resurgent India’ bonds soon after the announcement of nuclear tests and sanctions that followed. The scheme raised $ 4.2 billion in capital. In 2000, the government launched ‘India Millennium’ deposits on the back of rising fuel prices and slowing capital flows. That scheme attracted $ 5.5 billion.
However, experts say a $ 5 billion scheme may not make any significant difference to India’s financial woes. According to a section of experts, India would need something close to $ 15 billion to $ 20 billion to have a meaningful impact on the economy.
However, the situation now is starkly different from the time that those bonds were launched. India’s current forex reserves stand at $289 billion, which is $21 billion less than from a year ago. At the time of Resurgent India bonds, forex levels were at $28 billion, while they were $36 billion when the India Millennium bonds were issued.
The rupee dropped a little over 3 per cent against the dollar last week, its worst weekly decline in nine months, weighed down by mounting concerns over the global as well as India's economy. Analysts say the rupee could continue to fall further in the near-term, dragged down by the momentum from the worsening global risk environment.
External Commercial Borrowings limit has been lifted to $40bn from $ 30bn earlier. This would be to repay outstanding rupee loans of Indian businesses. This comes as a relief to the manufacturing sector. The rupee loans are expensive while foreign currency loans are cheaper. In addition, manufacturing and infrastructure companies -- as well as those that have foreign exchange earnings -- can now avail of ECBs of up to $ 10 billion to repay rupee loans invested in capex, or for fresh rupee capital expenditure.
The RBI’s measures were part of a package to halt the slide in the rupee and to prop up a sagging economy. However, the markets were clearly unimpressed with the central bank's efforts: the Bombay Stock Exchange's benchmark Sensex fell below 17,000 mark shortly after the announcement. The Sensex closed 0.53 per cent lower at 16,882.16. The rupee gave up gains to fall to 56.94 at 2:38 p.m. after having hit 56.40 earlier in the day. The rupee has lost over 25 per cent in the last one year.
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"The market was expecting a slew of measures. The measures announced now won't have any direct material bearing on the rupee. Unless the RBI comes in with more measures, the rupee will fall back to the 57-58 to a dollar levels," said M Natarajan, head of Treasury at the Bank of Nova Scotia in Mumbai.
As part its efforts to reduce currency volatility and infuse more liquidity into the system, the central bank also raised the limit on foreign institutional investor (FII) investment in government securities in India by $ 5 billion to $20 billion.
The RBI has decided to widen the non-resident investor base to include sovereign wealth funds, pension funds and insurance funds in government securities with a limit of $ 20bn. This is in-addition to raising the FII investment limit by $ 5bn. However, these new entities will need to be registered with capital markets regulator Securities and Exchane Board of India.
(Also read: Government, RBI announce steps to boost economy: 10 developments)
Qualified Foreign Investors (QFIs) can now invest in those mutual fund (MF) schemes that hold at least 25 per cent of their assets (either in debt or in equity or both) in the infrastructure sector under the current USD 3 billion sub-limit for investment in mutual funds related to infrastructure
Earlier, outgoing Finance Minister Pranab Mukherjee said the RBI would shortly issue a circular announcing steps the government was taking to arrest declining growth, and that he had had discussions with RBI deputy governor Subir Gokarn. Mr. Mukherjee will resign on Tuesday to run for President.
On Sunday, Mr Mukherjee had said that the government and the Reserve Bank of India would take steps to halt the fall in the rupee and improve market conditions. He said that the government had discussed the rupee’s depreciation with the central bank governor on Friday.
The Indian currency has fallen 10.92 per cent since the beginning of the current fiscal and hit an all-time low of 57.33 against the dollar in June 22. The economy has slowed to 6.5 per cent for fiscal 2012, while inflation has risen to 7.5 per cent in May. Earlier this month, the central bank defied calls for a cut in interest rates, choosing instead to keep the policy rate unchanged at 8.0 per cent and the cash reserve ratio at 4.75 per cent.
Industry had been hoping that the central bank would relax the limit on external commercial borrowings. The earlier cap was at 350 and 500 basis points over the existing London interbank rate, for loans of up to 3 years and more than 5 years, respectively.
The existing NRE rate is 9 per cent-plus, while the Foreign Currency Non-Resident (FCNR) rates are LIBOR + 200 basis points and LIBOR plus 300 basis points for the 1-3 year and 3-5 year longevity, respectively.
Market analysts had expected RBI to announce an increase in interest rates for deposits of Non-Resident Indians.
They also expected that the government would announce a bond issue to attract inflows. “RBI may increase the interest rate on FCNR(B) deposit further and announce the issuance of bonds for Non-Resident Indians to address the issues in the short-term,” Crisil Chief Economist D K Joshi had said.
In 1998, India had launched the ‘Resurgent India’ bonds soon after the announcement of nuclear tests and sanctions that followed. The scheme raised $ 4.2 billion in capital. In 2000, the government launched ‘India Millennium’ deposits on the back of rising fuel prices and slowing capital flows. That scheme attracted $ 5.5 billion.
However, experts say a $ 5 billion scheme may not make any significant difference to India’s financial woes. According to a section of experts, India would need something close to $ 15 billion to $ 20 billion to have a meaningful impact on the economy.
However, the situation now is starkly different from the time that those bonds were launched. India’s current forex reserves stand at $289 billion, which is $21 billion less than from a year ago. At the time of Resurgent India bonds, forex levels were at $28 billion, while they were $36 billion when the India Millennium bonds were issued.
The rupee dropped a little over 3 per cent against the dollar last week, its worst weekly decline in nine months, weighed down by mounting concerns over the global as well as India's economy. Analysts say the rupee could continue to fall further in the near-term, dragged down by the momentum from the worsening global risk environment.
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