Foreign and domestic financial institutions have asked the finance ministry to build up a war chest of at least $20 billion as foreign exchange reserves to fight the depreciation of the rupee.
The institutions have, however, advised that it is not necessary to raise the money at one go. Instead it can be staggered over the current financial year. They have also suggested that a sovereign bond issue should not be attempted now.
In turn, the government plans to allow relaxations in the withholding tax regime on debt papers to encourage more investment flows.
The institutions made the comments when finance minister P Chidambaram met them in Mumbai on Saturday. They have also advised the minister that a war chest is essential, for the RBI to mount an effective defence of the rupee as the inflow of foreign exchange is expected to be tepid this year through normal channels.
“We have given a list of measures that can be used to build up the reserves over the year, without any adverse impact on the markets”, said a top level source. India’s foreign exchange reserves (minus gold) is at $251 billion as per the latest RBI data.
The government plans to ask several public sector financial institutions to raise money from abroad. Until now in FY’14, only four of them including IOC and ONGC have done so, deferring their issues primarily on account of rupee volatility. The finance ministry is keen that the domestic and foreign banks take steps to ensure that these fund raising measures go through successfully as several of the public sector institutions will do back to back fund raising.
After the meeting, secretary financial services Rajiv Takru said, “All measures to attract fund flows are under consideration. I think you should see something coming up shortly, say within a week or in the next 10 days.”
Takru however did not go into the specifics of the foreign exchange raising measures. Concerns among investors about the widening current account deficit have led to turmoil in the stock markets and a sharp depreciation of the rupee.
Chidambaram held a closed-door meeting with top bankers and foreign institutional investors on Saturday.
Their money is key to funding the current account deficit, as the government sought to allay apprehensions about India’s economic situation and appraise them of steps taken to boost growth and stabilise the rupee. “FIIs have sought certain explanations, which the finance minister gave them,” Takru