4:30 pm Attacking the government for not introducing any key reforms, the BJP today hit out at the UPA and alleged that the government has delivered a non-package rather than an economy boost that was expected by the market.”These measures announced by the govt were supposed to arrest the slide of the rupee but it has done no such thing,” Prakash Javadekar, BJP spokersperson at a press conference today, adding that the measures are too little, too late and don’t address the real problem of policy paralysis.
RBI’s single-point agenda is to arrest rupee fall
2: 45 Look like there is no major reform announcement
to boost the economy, but rather few measures just to boost the rupee, which has fallen 20 percent over the last one year owing to slowing economic growth, weak public finances, accelerating inflation and the risk of rating downgrades.
Soon after the RBI announced that it had increased FII limit in government bonds to $20 billion, while allowing up to $10 billion from overseas borrowings by India Inc for refinancing rupee loan, the markets turned red and are trading at the day’s low. This is because the markets were expecting bigger reforms to address the structural problems with the economy as a whole. The Nifty is down 17 points ay around 5125 levels while the Sensex is down 37 points at 16935 levels.
Mere RBI measures to just boost the rupee without any measures to improve India’s fiscal situation is only a short-term relief. Moreover, 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 experts.
The liberalisation measures for capital account transactions, which have come into operations with immediate besides increasing foreign fund inflows into the country are also likely to check slide of rupee against the dollar.
Chairman of the Prime Minister’s Economic Department C Rangarajan said today’s measures are aimed to solve only one problem— encourage capital flows to arrest the depreciation rupee. He added that economic policy is a continuing affair, which is why more measures would come as the economy evolves. However, the direct impact on the rupee wouldn’t occur immediately. The rupee slide will only be stemmed once the investment flows come in. “Rupee correction will only happen over time”, said Rangarajan.
Long term investors like Sovereign Wealth Funds (SWFs), multilateral agencies, endowment funds, insurance funds, pension funds and foreign central banks would be allowed to invest in government debts up to $20 billion, RBI said in a notification.
The decisions have been taken “in consultation with the government,” RBI said, adding that they will widen foreign investor base for government securities (G-Secs). “It has been decided to allow Indian companies in manufacturing and infrastructure sector and having foreign exchange earnings to avail of external commercial borrowing (ECB) for repayment of outstanding rupee loans towards capital expenditure and/or fresh rupee capital expenditure under approval route. The overall ceiling for such ECBs would be $10 billion,” the central bank said.
he sub-limit of $10 billion (existing $5 billion with residual maturity of 5 years and additional limit of $5 billion) would have the residual maturity of three years.
The terms and conditions for the scheme for FII investment in infrastructure debt and the scheme for non-resident investment in Infrastructure Development Funds (IDFs) have been further rationalised in terms of lock-in period and residual maturity.
The central bank likely sold $250-300 million dollars on Friday to rescue the Indian currency. However, a continuation of this move will put pressure on India’s forex reserves, which has fallen $ 21 billion over the last one year to $ 289 billion.
2:30 RBI Liberalises Measures To Boost Forex Flows
India took a handful of measures to prop up the embattled rupee, including increasing the limit on foreign investment in government bonds by $5 billion to $20 billion, the RBI said.
The reserve bank has also said that the overall ECB limit for manufacturing, infrastructure has been hiked to $10 billion. External Commercial Borrowings limit has been lifted to $ 40 billion from $30 billion earlier. This move would help repay outstanding rupee loans of Indian businesses.
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 $ 20billion. This is in-addition to the FII investment limit of $ 5 billion. However this will have limited impact without any changes to the withholding tax.
Overseas investors so far have not shown enough interest in infra bonds while the demand for corporate bonds and government bonds are relatively higher.
RBI said that Qualified Foreign Investors (QFIs) can now invest in those mutual fund (MF) schemes that hold at least 25 percent of their assets in infrastructure sector under the current $3 billion sub-limit for investment in mutual funds related to infrastructure.
FM extend resignation by a day, RBI to announce measure soon
1:09 pm RBI deputy Governor Subir Gokarn will release a circular later in the day announcing steps the government was taking to arrest declining growth, says Finance Minister Pranab Mukherjee.
I have had discussions with the Economic Affairs Secretary,” he said, adding that he would resign as Finance Minister on Tuesday to run for President. Economic Affairs Secretary R Gopalan is in talks with the central bank on taking steps to bolster the economy, he said.
Mukherjee also said the government had discussed the rupee’s depreciation with the central bank governor on Friday. 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 percent.
12:51 pm Pranab Mukherjee has extended his resignation by one more day to Tuesday. Markets are still expecting policy announcements from the department of economic affairs soon.
Bond issue, rate hike for NRI deposits on the cards today
11:14 am: The announcement is expected after the meeting of Finance ministry officials early afternoon.And the steps to be announced by the government and the RBI may include raising the interest for NRI deposits, cutting down wasteful expenditures and unveiling a bond issue for overseas investors to improve capital inflows in the wake of the rout in rupee.
“Private investment in India is constrained by lack of availability of funds. Government might announce some measures for attracting investments and also steps to cut down wasteful expenditures,” said Y K Alagh, Chairman, Institute of Rural Management. Hit by a weak global sentiment and subdued local macroeconomic performance, the rupee has lost over 25 percent in the last one year. It also breached the 57 level against the dollar on June 22.
Rupee-denominated bond for NRIs at 7.9 percent interest rate?
Looks like it will be a rupee-denominated bond for NRIs at 7.9 percent interest rates. 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.Alongside, certain measures may also be announced to shore up private investment, boost investor sentiment and cut down on wasteful expenditure further.
In 1998, India launched Resurgent India bonds soon after the announcement of nuclear tests and sanctions that followed. The scheme attracted $4.2 billion. In 2000, the government launched India Millenium Deposits on the back of rising fuel prices and slowing capital flows. The scheme attracted $ 5.5billion.
“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 said.
Experts also see steps being taken to reduce the twin deficits
CNI Research Head Kishor Ostwal said,”It might take steps to tame fiscal and current account deficits.”
Another possibility is allowing oil importers to buy their dollars directly from the Reserve Bank of India (RBI) rather than via the foreign exchange market.
However, analysts said these sorts of measures would provide only stop-gap relief and that India needed to improve its economic fundamentals, including addressing its current account deficit, to bolster the rupee.
“The problem with the rupee is fundamental, and technical measures cannot be supportive over a longer period of time,” said Sanjay Mathur, an economist with Royal Bank of Scotland in Singapore.
“But it is also important to note that all the India-centric factors for the fall in the rupee, like lack of reforms, has been priced in. Further weakness will be because of the global risk-averse sentiment,” he told Reuters.
9.15am: Finance Minister Pranab Mukherjee is expected to exit the government with a flurry of policy announcements to arrest the free fall of the rupee, which plunged to new depths last week, and atrract inbound investments.
Mukherjee said over the weekend that a number of measures to arrest the Rupee’s slide would be announced on Monday, but was not clear on whether the steps would be taken by the central bank or the government.
Simultaneously, finance ministry officials are hinting at the launch of a dollar bond for NRIs, along the lines of the Resurgent India Bonds of 1998 and perhaps a hike in interest rate on NRI deposits.
There is also some talk of offering foreign portfolio investors a higher ceiling on investmetns in bonds issued by the Indian government as well as India corporates; the government is also signalling that it will get cracking on the qualified financial investor (QFI) window to allow foreign investors to buy into Indian equities. (curtsey : first post)
Rupesh Yatesh Dalal
Head Research Department
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