The casualty of all these problems was the Indian Rupee which became worst performing currency in the emerging markets. Our post on Rupee and its Value Depreciation was in response to this free fall of the Indian currency.
Since then, the govt. and the RBI have been taking various steps to shore up the Rupee and bring some sense of stability to the Indian currency. It seems they have had their desired effect and the Rupee fall has been checked for now. Here we present the most important steps taken by the regulatory authorities and what effect it has had on the depreciating Indian Rupee.
- Import Duty Hiked on Gold
- Forex Swap Window for OMCs
- Govt. Clears 36 Infrastructure Projects
- Announcements by New RBI governor
- Currency Swap Agreements Between Trading Nations
- Conclusion
Import duty hike on Gold :
The import duty on gold has been hiked three times in the past several months. Presently the import duty is 10%. It is a clear signal that the Govt. views the huge import of gold as a contributing factor to the depreciation of Rupee and also the CAD. There is room for further duty hikes if the gold imports are not seen as reducing.In addition to the import duty hikes, the RBI has directed that 20% of every consignment of gold imported into the country should be specifically earmarked for exports, further emphasising the fact that the authorities want the import of gold to be brought under control at the earliest.
Forex Swap Window for OMCs :
After moving on to tackle the import of gold (one contributing factor to our present woes), the RBI moved to tackle another big component which was seen as contributing to the volatility in the forex markets, namely oil imports.Then, the RBI opened a special forex swap window under which RBI will undertake sell/buy USD-INR forex swaps for fixed tenure with the state-owned OMCs. Under this window the RBI will meet the entire daily dollar requirements of the state-owned OMCs by lending dollars to the OMCs in exchange for rupees for a limited tenure which is yet to be decided. By doing so, the huge dollar-demand by the oil companies which was creating much of the volatility in the forex market was effectively taken out of the system. This was the first major step which gave rise to early signs of recovery for the INR.
The RBI had earlier directed that all state-owned Oil Marketing Companies (OMCs) (HPCL, BPCL, IOC), that they should opt for a designated state-owned bank for their dollar demands rather than competitive bidding, thus restricting the volatility in the forex market to a great extent.
36 Stalled Infrastructure Projects Cleared :
During the recently concluded session of the parliament, the govt. moved swiftly and gave clearance to about 36 infrastructure projects which were stalled for want of various approvals and clearances. Most of these projects have huge foreign investments and clearing them means that the road has been cleared for inflow of these foreign investments to the country.However this is a long-term step and the effect it will actually have on the economy of the country will be evident only after the investments actually start to flow in. Just the news that all these projects were cleared gave much respite to the markets.
Big Bang Announcements by the New RBI Governor :
As soon as the new Governor of the RBI took office, he made some key announcements which have the potential to increase dollar inflows and give a short-term respite to the Indian currency.- The RBI opened a window to the banks to swap the fresh Foreign Currency Non Resident (Banks) (FCNR(B)), dollar funds, which have a minimum tenure of 3yrs, for a fixed interest rate of 3.5% per annum for the tenure of the deposits. The swap window will be open till 30th Nov.
- RBI has allowed banks with a capital adequacy ratio (CAR) of 12% to borrow overseas funds upto 100% of their unimpaired Tier-1 capital. These borrowings should be for a minimum period of 3yrs and banks can swap these funds for one to three years with RBI at a concessional rate of 100bps below the market rate.
Govt. Giving push to Currency Swap Agreements :
Recently India has enhanced its currency swap facility with Japan from USD 15bn to USD 50bn. Govt. has set up a taskforce to identify key trading nations with which local currency swap agreements can be put in place. The target countries are the other five BRICS nations and other such countries with which India has huge running trade deficits.By putting in place such currency swap agreements the govt. aims to reduce its dollar dependency currently, insulate the markets from dollar induced currency volatility and also reduce the future effect that the QE tapering (when it happens) will have on the Indian economy. Obviously, this is a long drawn process and what effect it will have on the Indian economy, will become evident only in due course of time.
