The Reserve Bank of India (RBI) has in a bid to offset the tide of the foreign currency inflows that have sharply strengthened the Rupee against the dollar, on this Tuesday the 25th September, 07, lifted some of the curbs on Capital Outflows as a part of ongoing efforts to eventually lift curbs on currency transactions and create a fully convertible Rupee from a partially one {The Committee on Fuller Capital Account Convertibility (CFCAC), gave its report  last year, in September laying down road map for 5 years  to make the Rupee fully convertible hence doing away with RBI approval} There have been relaxations brought in with immediate effects for local companies, mutual funds and individuals to tame the rising rupee.

These amendments were the need of the Hour. The Rupee (risen by around 11% in 2007) closed at a new nine – year high of 39.74 per US Dollar on 25th September, 2007 so that you could now buy one US dollar for only Rs 39.91 which a few years back was available for more than Rs 44. Overall rise in last 15 days was around 2%, thanks to the US Fed rate being cut by 50 basis point and led to FFI’s bringing in billions into the country accumulating the total FDI in the country to $ 11 billion. Hence the said measures.

The Treasury Head of Kotak Mahindra Bank Ltd. said “The purpose is to create a demand for dollars in order to neutralize the large inflows that are coming into the country”.

Thus in view of the above and in consultation with the Government of India, RBI decided to accelerate the implementation of the third phase of the recommendations of CFCAC with regard to the foreign exchange outflows. The measures announced with immediate effect are:  

i). Investment in overseas Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS) by Indian companies will now be permitted up to 400 per cent of the net worth of the Indian company under the Automatic Route. The enhanced limit will also be available to registered partnership firms.

ii) In order to provide greater opportunities to listed Indian companies for portfolio investment abroad, the existing limit of 35 per cent of the net worth for portfolio investments by listed companies is being increased to 50 per cent of the net worth. Further, the requirement of 10 per cent reciprocal share holding in the listed Indian Companies by overseas companies for the purpose of portfolio investment outside India by Indian listed companies has been dispensed with.

iii) The existing limit for prepayment of External Commercial borrowings (ECBs) without the Reserve Bank approval is being increased from USD 400 million to USD 500 million, subject to compliance with the minimum average maturity period as applicable to the loan.

iv) The aggregate ceiling for overseas investments by mutual funds, registered with SEBI is being increased from USD 4 billion to USD 5 billion. In addition, the existing facility of investing up to USD 1 billion in overseas Exchange Traded Funds, as may be permitted by SEBI by a limited number of qualified Indian mutual funds would continue.

v) The existing limit under Liberalised Remittance Scheme (LRS) is being enhanced from USD 100,000 to USD 200,000 per financial year. The operational guidelines on the measures will be issued separately.   

Lets have a look at what the market experts in India have to say: market experts were quick to suggest that these measures may not ease the pressure on the Rupee, even if it could have a “feel-good” effect on companies and the steadily rising Sensex.

1. JPMorgan Asset Management India Pvt. Ltd  :”his is a positive step in the direction of allowing investors to diversify their portfolio across the border, We have already witnessed huge investor interest in the international funds from reputed mutual fund houses in India. Evidently, all these small steps lead to the ultimate objective of full capital convertibility, The impact of these steps will be to send money out of the system. We view this as an extremely positive step. This is a feel-good factor for the market.”

2. ABN Amro Asset Management (India) Pvt. Ltd. “The bigger impact of this move is that it gives greater flexibility to the investors and the companies”

Some observations here: Tell me what you think of them.

1. such interventions with RBI could have been brought about much earlier for controlling the rise in Rupee. Also its obvious inspite of these liberalisation norms, FII’ wont stop their inflows, hence the inflows would anyways be MUCH higher than the outflows.

2. This statement by an independent foreign exchange expert are worth considering: “When stock markets in our country are booming and credit windows internationally are closed, there is no reason for Indian companies to invest abroad now.” So will these measures have an impact?

3. international markets are still recovering from the US-led subprime, or risky loans – limits the benefits

4. A time when Indian firms are in a capital expansion mode, it is unlikely they will place much stress on portfolio investments abroad.

5. Those looking at large M&A to get the benefits in their balance sheets would be happy. 

Further, currently, individual mutual funds can invest $200 million or 10 per cent of its assets under management overseas, whichever is higher- Does this cap make a difference in real terms. I think it should be removed. 

In a nutshell, these measures may not ease the pressure on the rupee, even if it could have a “feel-good” effect on companies and the steadily rising Sensex.

Do you agree? Share your opinion here.

We will keep you updated with what’s on.
 

This entry was posted on Thursday, September 27th, 2007 at 6:25 pm and is filed under Business, Investment, Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.