RBI moves to limited capital controls to save Indian rupee

Aug 15 2013, 09:05 IST
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The restrictions, ONGC and Oil India, the RBI said in a release. The restrictions, ONGC and Oil India, the RBI said in a release.
SummaryThe restrictions, ONGC and Oil India, the RBI said in a release.

With the rupee drifting down to a lifetime low of 61.44 to the dollar, despite measures to tighten liquidity and push up interest rates, the Reserve Bank of India (RBI) on Wednesday changed tack, choosing to defend the currency by moving towards capital controls. The central bank put restrictions on the amount of foreign exchange Indian companies and individuals can invest, remit or spend overseas in an attempt to curb dollar outflows from the country. Indian companies can now send out only 100% of their net worth as overseas direct investment (ODI), way below the current cap of 400%, under the automatic route. The restrictions, however spare Navaratna public sector entities ONGC and Oil India, the RBI said in a release.

The RBI also capped remittances abroad by resident individuals to $75,000, down sharply from $200,000 allowed earlier under the liberalised remittance scheme. Further, Indian residents cannot invest in real estate abroad. Individual remittances abroad totalled about $3 billion during 2012-13.

To encourage banks to garner more dollars through non-resident rupee deposits and foreign currency non-resident deposits, the RBI exempted banks from maintaining the cash reserve ratio and the statutory liquidity ratio on incremental NRI deposits with a tenure of three years or more.

With the rupee has depreciated by 13% since April this year and having fallen despite measures initiated by the central bank since mid-July, economists believe that the RBI is readying long-term initiatives. “The policy is not aimed at tackling any immediate situation, but should be construed as a safeguard against a more difficult situation,” observed Samiran Chakraborty, MD and head of research, Standard Chartered Bank.

ODI by Indian corporates was $300 million in April-May FY14. In FY13, Indian firms invested $7.1 billion overseas, according to the RBI’s August monthly bulletin. The central bank did soften the blow, saying genuine investment plans, beyond the limits imposed, could be considered under the approval route.

According to Shankar Raman, chief financial officer at Larsen & Toubro, seen from industry’s perspective, this does seem like a sharp cut although some measures were expected given the depreciation of the rupee. “The quantum of the cut, however, was expected to be smaller at 200% rather than to 100% and this will constrain overseas investments by Indian companies,” Shankar Raman said.

The first round of measures, aimed at arresting the fall in the rupee, had tightened liquidity by limiting banks borrowings from the RBI’s special window, a move that

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