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India goes back two decades as RBI imposes capital curbs to stabilise rupee--ECONOMIC TIMES for GD/general awareness/interview

India goes back two decades as RBI imposes capital curbs to stabilise rupee

MUMBAI: The Reserve Bank of India imposed partial capital controls on companies and individuals to stabilise the rupee, but the steps are likely to be perceived as turning the clock back on two decades of liberalisation.

Overseas direct investment (ODI) by Indian companies has been cut three-fourths, 100% from 400%, making it more difficult for local corporates to buy overseas assets. But the central bank exempted state-run Navratna companies, including Oil IndiaBSE -4.54 % and ONGC Videsh, to ensure that its moves do not cripple energy security.

RBI lowered overseas remittances by locals to $75,000 a year from $200,000, and prohibited investments in overseas property, dashing wealthy Indians' dreams of owning homes abroad. However, those in genuine need of foreign exchange beyond $75,000 per year could apply to the central bank for permission.

"It's essentially capital control," said Neeraj Gambhir, MD at Nomura. "(But) the actual impact on outflows may not be large since the approval route is still open and some parts are outside the purview of these measures. The signalling effect is, however, important," he said.

Defending the steps, Finance Minister P Chidambaram told ET NOW there was no intention of bringing back capital controls. "RBI's measures are not to be understood as capital control. The announcement preserves the right of a corporate to go to RBI and seek approval in case it wants to take out more than 100% of net worth. These are temporary measures and I am sure RBI will revisit them at an appropriate time," Chidambaram said.
Description: India goes back two decades as RBI imposes capital curbs to stabilise rupee
"These measures are to create a stable policy environment for rupee," Arvind Mayaram, secretary, department of economic affairs, told reporters on Wednesday evening. "When the rupee finds its level, these could be reversed," he added.

While seeking to curb outflows, RBI also incentivised banks to raise US dollar deposits by exempting fresh deposits by overseas Indians from reserve requirements. Currently, 4% of deposits have to be held in cash with RBI and 23% of the deposits have to be used to buy government bonds.

RBI also raised the ceiling on foreign currency non-resident (bank) deposits to 400 basis points above the benchmark Libor, or London interbank offered rates, from 300 basis points earlier for deposits maturing between 3 years and 5 years.

Further, the interest rates that banks can offer on non-resident (external) rupee deposits have been de-linked from the domestic rupee deposit rates. Earlier, banks had to keep their rates on non-resident (external) rupee deposits lower or at par with rates offered on domestic rupee deposits.

For good measure, RBI, which came up with a flurry of announcements on Wednesday evening, also banned imports of gold coins and medallions and tightened the links between gold imports and exports.

Indian companies, which are buying assets overseas due to poor domestic investment climate, will be the worst hit because of the controls on overseas investments.

"This is going to put the brakes on overseas ventures and mergers and acquisitions of Indian businesses," said Amarthaluru Subba Rao, group chief financial officer at RPG Group, which comprises tyre maker Ceat and technology company Zensar. "On the one hand, the domestic scenario is not in a good shape whereas Indian businesses are restrained to make investments abroad. It's clearly a double whammy. Overseas business plans have to be reworked now."

But Chidambaram insisted that the intention was not to discourage corporates. "The most important point is that corporates are not being discouraged from acquiring assets abroad or investing abroad. It's just that the limit has been tweaked."

Overseas direct investments in April-July this fiscal were $14.42 billion, up from $9.79 billion in the year-ago period, data from RBI shows.

This includes investments through equity, loan and guarantees issued.

Indians remitted $1.2 billion under the so-called Liberalised Remittance Scheme for individuals in fiscal 2013, RBI data shows.

"Investments under the LRS scheme were not very large, so this move will have limited impact," said Rupa Rege Nisture, chief economist, Bank of Baroda.

"These measures would be rolled back once stability returns to the foreign exchange market. One should only ensure that withdrawal of these liberalised schemes should not give a negative signal to overseas investors."

Governor Duvvuri Subbarao and Finance Minister P Chidambaram have been busy announcing measures since July 15, including raising short-term interest rates by 200 basis points and squeezing liquidity in order to stall the rupee's collapse. Gold imports, a key factor in the ballooning current account deficit - the excess of consumption overseas than earnings - have been curbed through a series of hikes in import duties. But the currency nonetheless ended at a fresh closing low of 61.44 to the US dollar on Wednesday amid expectations of the US liquidity tap shutting.

The Indian rupee is among the worst-performing emerging market currencies since May 22, depreciating by 14%, after Federal Reserve Chairman Ben Bernanke signalled he may close the tap on liquidity.

Bernanke's $85-billion-a-month bond purchases and zero interest rates helped drive investors to emerging economies' assets.

But foreign institutional investors that invested in Indian debt began pulling out once yields on US treasuries rose following Bernanke's comment. Adjusted for currency hedging, foreigners now lose money if they buy Indian government bonds as US government bonds are yielding 2.7%. They have sold Indian debt worth $10 billion since May.

The Reserve Bank started liberalising overseas direct investment norms in July '04, permitting Indian entities to invest in overseas joint ventures and wholly owned subsidiaries up to 100% of the net worth, which was gradually raised to 400% by 2007.

Annual remittances under LRS were introduced in February 2004 to facilitate resident individuals to freely remit up to $25,000 a year for some current account as well as capital account transactions, which was gradually raised to $200,000 by September 2007.

India goes back two decades as RBI imposes capital curbs to stabilise rupee--ECONOMIC TIMES for GD/general awareness/interview Reviewed by sambasivan srinivasan on 5:50:00 PM Rating: 5

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