India unveils steps to boost currency inflows.
The rupee is down about nine per cent since the start of March and suffered steep falls in the last three sessions before recovering its daily losses yesterday. The Reserve Bank of India (RBI) is believed to have stepped into the market to defend the currency on Wednesday and Thursday, and possibly yesterday, traders said.
However, with limited reserves and India's negative balance of payments, the RBI has little firepower to defend the rupee. Encouraging dollar inflows would lend support to the currency.
The rupee lost 2.3pc this week, closing at 53.47/48 to the dollar, putting it close to the record 54.30 plumbed in December. Traders blame the drop on worry about India's current account and fiscal deficits as well as new tax proposals.
"These measures will aid from the sentiment perspective, but a structural solution will be addressing the fiscal deficit, current account deficit and growth," said Hitendra Dave, global markets head at HSBC in Mumbai.
The RBI relaxed the interest rate ceiling on foreign currency non-resident (FCNR) deposits of banks with maturities of one year to less than three years to 200 basis points above the LIBOR or swap rate, from 125 basis points now.
On three to five-year maturity FCNR deposits, the rate ceiling will be relaxed to 300 basis points above LIBOR.
The central bank also allowed banks to freely determine the interest rates on export credit in foreign currency.
"Maybe some foreign fund inflows will be augmented because of this step, but I don't think it is enough to stop the downward fall of the rupee," said Ashtosh Raina, head of foreign currency trading at HDFC Bank.
"I think the RBI is trying to address the issue step by step, and this is the first move," he said, adding that the rupee was likely to remain in the 53-54 range.
The measures, announced after the close of markets yesterday, will be effective from today.
Foreign investors have been spooked by a lack of clarity around India's move to crack down on the use of tax havens through its proposed General Anti-Avoidance Rule (GAAR).
A trader at a foreign bank said the RBI's moves may improve sentiment but not translate into near-term flows as the measures will take time to have an effect. Net portfolio outflows from India stood at around $540 million in March and April compared with $13 billion in inflows in January-February.
One senior dealer at another foreign bank in Mumbai said he was not inclined to sell dollars and buy rupees as a result of the RBI's moves because he did not think they would be enough to bolster the rupee.
"I won't sell by these measures. No FIIs (foreign institutional investors) will sell. The market is worried about GAAR. I don't think exporters will be convinced and sell," said a senior foreign bank dealer.
The RBI does not set a target for the level of the rupee but steps into the market to smooth volatility. During a plunge in the currency at the end of 2011 it also implemented a series of administrative measures in addition to selling dollars, steps that proved effective at the time.
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