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    View: RBI moves quickly to stabilise forex rate but these measures might help rupee more

    View: RBI moves quickly to stabilise forex rate but these measures might help rupee more

    View: RBI moves quickly to stabilise forex rate but these measures might help rupee more
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    By CNBCTV18.com Contributor  IST (Updated)

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    The RBI’s steps so far are largely tactical measures to manage the dollar outflows for the next 4-5 months. Persistent dollar outflows and the RBI intervention point toward a clear dollar short supply in the spot market which the central bank is trying to address by offering short-term incentives for FPIs.

    The Reserve Bank of India (RBI) announced a slew of measures to boost inflows of foreign exchange in the country. India’s forex reserves have shrunk in the past few months because of the higher cost of imports, especially crude oil, combined with a sell-off in the stock markets by foreign investors. This has put severe pressure on the rupee, which hit a new low against the dollar. The RBI’s measures are meant to remedy this situation and make India attractive to foreign investors, especially foreign portfolio investors (FPIs). Exactly how well they will work will be apparent in the days to come. The measures can broadly be segmented into low–, medium– and high–impact.
    Low- to medium-impact
    • Increase in Overseas Borrower limits: As this dispensation is available only up to December 31, 2022, investment grade firms will benefit in the short term as they will be able to raise dollar-denominated debt for expansion and other process improvement activities.
    • Higher interest rates on NRI deposits: This relaxation on higher interest rates can be availed only up to October 31, 2022, so this measure may help in the short term by increasing foreign currency deposits. However, with the rising interest rate regime globally, NRIs may prefer to stay invested in foreign assets especially considering the exchange rate risk. With the US Fed also increasing yields on treasury bills, it remains to be seen if NRIs choose India as an investment destination instead of investing in US T-bills.
    • Exemptions for CRR and LSR for incremental NRI deposits: This means that banks will not be required to place a certain percentage of the incremental funds remitted by NRIs as liquid reserves. This will allow banks to do more business and save on the cost of funds allowing them to pass on the benefits to customers through higher interest rates on deposits. However, if there is a US treasury rate hike, FPIs may start pulling back more funds from the Indian market. As none of these incremental funds are into safe and liquid investments, banks may face a slight stress scenario when it comes to servicing deposit withdrawal.
    • High impact
      • FPI investment in debt: Of all the measures announced by RBI, the ones for FPI investment in debt would possibly have the greatest impact when it comes to stabilising foreign investments in the Indian debt market. Inclusion of G-Sec with additional tenors (7 years and 14 years) and relaxing the short-term investment limits in G-Sec and corporate debt will improve the sovereign yield curve and liquidity in the market thereby providing more dollar inflows. Additionally, allowing FPIs to invest in corporate CPs will help diversify their short-term borrowings.
      • Settlement of international trades in Indian Rupees: This is a major reform and has the potential to arrest Rupee depreciation in the long term as the country’s demand for US dollars would decrease. However, this reform may be more attractive for trade with countries like Russia and Iran, which are facing US sanctions.
      • The RBI’s steps so far are largely tactical measures to manage the dollar outflows for the next 4-5 months. Persistent dollar outflows and the RBI intervention point toward a clear dollar short supply in the spot market which the central bank is trying to address by offering short-term incentives for FPIs. The current global situation has resulted in a flight to safety, which hugely favours the dollar. Most currencies, including the Euro and the UK Pound Sterling, have faced the same pressure as developing country currencies. The Indian Rupee has actually held up well compared to many others. Although it has depreciated by 5 percent in CY 2022, it is still doing better than many other developed country currencies like Euro and Sterling, which are down by more than 10 percent in CY 2022 against the dollar.
        The RBI has moved quickly to stabilise our exchange rate and reduced volatility in the forex market. But given that the currency depreciation is driven more by global factors (like the Russia-Ukraine war and fears of global recession) and not by any domestic weakness, the Indian central bank should consider a few other tactical and strategic measures to add to those it has already announced.
        Tactically, the RBI could continue to intervene in the overseas non-deliverable forward (NDF) market, which will allow for round-the-clock trading of the rupee and continue to allow foreign subsidiaries of Indian banks to participate in the offshore rupee derivative market to help stabilise the volatility in the forex market.
        The strategic measures the government and the RBI should consider for the long-term stability of the rupee would include the following:
        • Allowing the inclusion of G-Secs in global indices to improve the liquidity of G-Secs and dollar inflows
        • Encourage Indian corporates to raise foreign currency convertible bonds (FCCBs) and focus on improving the corporate debt market in India (a liquid CDS curve for any India corporate will give much-needed confidence to foreign investors)
        • Strategic partnerships with oil exploring sovereigns with settlement done in Indian rupees. Additional steps like staggered payments for commodity imports and forward payment contracts (when macroeconomic conditions are favourable) can be explored
        • Building infrastructure and promoting the use of electric vehicles to reduced dependency on oil imports
        • Relaxing restrictions (with caution) on current account and capital account coverability to allow free movement of rupee and other foreign currencies
        • Improving policies for the financing of local manufacturing and export of goods
        • Encouraging global firms to set up and expand workforce in India by providing them tax incentives and easing the rules on land acquisition
        • These measures would not only help in attracting more long-term foreign currency investments but also help improve the per capita income of the country. The options available to the RBI are many – it needs to pick and choose and implement as and when it thinks the time is right.
          —The author, Subrahmanyam Oruganti is Financial Services Partner, EY. Views expressed are personal
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