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    RBI steps in to bolster sagging rupee and attract more foreign flows

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    RBI steps in to bolster sagging rupee and attract more foreign flows

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    RBI has excused banks from keeping SLR and CRR on Incremental Non-resident FX Deposits Made into FCNR(B) and NRE accounts. It has also removed the interest rate caps on deposits over one year. Chances are banks, especially private banks which run a tight ship, may aggressively market the new FCNR(B) deposits to their overseas Indian clients in the Middle East and elsewhere, so as to avail of the CRR and SLR exemption. For the FX market, this could mean extra inflows that can fund the current account deficit.

    The Reserve Bank of India (RBI) has moved in its customary sudden sharp style. It has announced a bunch of steps liberalising foreign inflows, that are bound to send speculators with short positions running for cover. For now, with crude sliding, the rupee looks unlikely to get to Rs 80 against the US dollar anytime soon.
    Here's what RBI did on July 6: It excused banks from keeping SLR and CRR on Incremental Non-resident FX Deposits Made into FCNR(B) and NRE accounts. It has also removed the interest rate caps on deposits over one year. Chances are banks, especially private banks, which run tight ships, may aggressively market the new FCNR(B) deposits to their overseas Indian clients in the Middle East and elsewhere, so as to avail of the CRR and SLR exemption. For the FX market, this could mean extra inflows that can fund the current account deficit.
    Also, RBI has allowed more bonds under the FAR or the fully accessible route (FPIs can invest any amount in FAR securities. In others they are restricted to about 5 percent). Dealers say the newly included bonds under FAR, the 7-year and 14-year bonds are much in demand and may be attractive to foreigners.
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    Further, FPIs can now invest unlimited amounts in under one-year maturity bonds. This is an effective step because currently FPIs are allowed to buy only bonds with over one-year residual maturity and the FPIs sell off when maturity dips below 365 days. This selling will stop now. Indeed fresh dollars may come looking for yield arbitrage.
    Thirdly, banks raising foreign loans have been given wider options to lend the money. Hitherto they could only lend to exporters. Finally, companies can now raise ECBs (External Commercial Borrowings) up to $1.5 billion via the automatic route, up from $750 million earlier. While this is a major easing of doing business, bankers say companies may not raise too much money till the global macros stabilise.
    ——————————————————————————————————————                               RBI's Salvo To Prop Rupee
    CRR, SLR excused on FX deposits mobilised between July 1 to November 4
    Removes limits on interest rates offered by banks on FCNR and NRE deposits till October 31
    New 7 and 14-year Gilts open to FPI invest in fully accessible route
    Companies can now borrow FX debt worth $1.5 billion a year against $750 million earlier
    —————————————————————————————————————
    These steps have obviously come because the rupee is sliding to fresh all-time lows practically every day in the past two weeks. Separately, the country's trade deficit has also been burgeoning due to pricier crude and coal imports raising fears that the deficit can be funded only by the rapid depletion of reserves.
    RBI argued in its press release that the Indian economy is resilient but the tightening by foreign central banks is having spillover effects on all emerging markets (EMs) including India. It pointed out that the rupee has depreciated only 4.1 percent this year which is much less than many EM and even DM currencies. (The Euro and the Yen, for instance, are trading at 20-22 year lows). However, it is announcing these steps to ensure greater foreign inflows, so as to counter the impact of volatile global markets which are leading to outflows from all EMs.
    Bankers agree that with no caps on the interest they can offer on FCNR(B) and NRE deposits and the added advantage of no CRR and SLR requirement, they will aggressively seek investors into these deposits. Bankers also expect foreign funds to be attracted to short-term Indian corporate papers.
    More important, funds will hedge the new inflows through sell-buy swaps in the forward market. The increase in buy calls in the forward market will enable RBI to do sell-buy swaps in the forward market to protect against any rupee fall. In the past few weeks, RBIs excessive sell-buy swaps in the forward market led to the crash of the forward premiums, which in turn attracted speculative shorting in the spot market.
    Besides bringing inflows, this sudden announcement will also impact sentiment. This sudden salvo will bleed those with short rupee positions and they will desist from further speculative shorting, for fear that RBI may fire more steps.
    Some experts believe the RBI may be over-reacting and that rupee depreciation has been orderly and much less than other EM currencies. However, RBI probably wants to be sure than sorry. The rising trade and current account deficits need to be financed and speculators needed to be kept at bay, lest sentiment gets unhinged.
    With oil also receding sharply for the past week, it now appears that the level of Rs 80 against the US dollar is a distance away, On the flip side, this level of Rs 80 against the US dollar shouldn't become an albatross around RBI's neck — a level it will defend at any cost.
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