Tuesday, September 3, 2013

Why is the Indian Rupee Recovering?

After two weeks of intense pressure and uncontrolled downward movement, I am happy to share with you that the Indian Rupee is indeed recovering. Over the past 72 hours the fall has been arrested and in fact the rupee has posted handsome gains. So, what was it that happened 3 days ago that has stopped this devaluation of the Rupee?

The idea behind this article is to go over the many policy changes that were done by the RBI and our Finance Ministry over the past few days that has played a positive role in this rupee recovery. To top it all off, the new Government of the RBI is taking over as of today and the market sentiment is positive given his impressive resume...

The following are the 10 important measures announced by the Authorities over the past few days that have caused this positive movement for the Rupee:

No. 1: Availability of Dollars for State Owned/Run Oil Refineries

The RBI announced late on Wednesday last week that, a special window to sell dollars through a designated bank to Indian Oil Corp Ltd , Hindustan Petroleum Corp and Bharat Petroleum Corp

Why: Oil is India's largest import item and state refiners are the biggest buyers of dollars in the foreign exchange market. As you may know, our oil refineries Indian Oil Corp Ltd , Hindustan Petroleum Corp and Bharat Petroleum Corp import oil from foreign countries and pay for it in US$. To make this payment these oil co.’s purchase USD from the open market which affects the rupee and its value negatively. The move will remove USD 400 million to 500 million of daily demand from the spot market.

No. 2: Restricting the Import/Purchase of Gold

The government has come up with the following restrictions:

* Import duty on gold has been raised for the third time in eight months to 10% from 8%
* Factory Gate Duty on Gold Bars is hiked to 9% from 7%
* Import of Gold Coins and Medallions is banned
* All imports of gold now need a license from the foreign trade office and would have to be brought into a customs-bonded warehouse.
* Unrefined gold will now be included under an existing rule stipulating that 20 percent of all imports must be used for exports, which is usually in the form of jewelry.

Why: Just like oil, Gold too is one of the biggest contributors for the Governments current account deficit as well as the pressure on the Rupee. The government is looking to contain gold imports at 850 tonnes this fiscal year, compared with 950 tonnes last year. Finance Minister P. Chidambaram said this would lower the import bill by USD 4 billion and help reduce our Current Account Deficit as well as reduce the pressure on the Rupee.

The Government has hiked the Import Tax on Silver too from 6% to 10%. Though this will not has as big an impact on either the Current Account Deficit or the Rupee, it will have a slightly marginal impact on the same lines as what Gold does.

No. 3: Importing Oil from Iran

The Government of India is looking for ways to boost its oil imports from Iran instead of the traditional oil sources in the Gulf.

Why: The price of oil sold by Iran is slightly lower when compared to other gulf countries and by doing so, it may bring down our oil import bill by around 1-1.5 billion USD which will help reduce our current account deficit as well as strengthen the Rupee.

No. 4: Restrictions on Import of Non-Essential Items

Though there have been no official rulings or communication from the Finance Ministry, there are plans to restrict/reduce the import of non-essential commodities like Fridges, TV's etc. The amount of restriction would vary depending on our Trade Agreements with foreign nations.

Why: Any Import into the country has a negative impact on the Rupee as well as on the Current Account Deficit. Restricting Imports will bring marginal savings to both the Rupee and the Current Account Deficit.

No.5: Quasi-Sovereign Bond Issues By State Owned Finance Corporations

The Government has given permission to State Owned Finance Corporations like Indian Railway Finance Corp Ltd (IRFC), Power Finance Corp (PFC) and India Infrastructure Finance Co Ltd (IIFCL) to raise funds from Overseas investors through Quasi-Sovereign Bond Issues. Around 4 billion USD is expected to be raised through this process. RFC will raise USD 1 billion. PFC and IIFCL will raise USD 1.5 billion each.

Why: Influx of US$ funds from foreign investors will boost the supply of US$ and reduce pressure on the Rupee.

No. 6: Allowing Sovereign Wealth Funds from Abroad to Invest in Tax Free Bonds

The government will allow Sovereign Wealth Funds (from abroad) to invest in Tax Free Bonds floated by State Run Infrastructure Companies. This will be in-synergy with the item no. 5 above and help raise the kind of funds that the government is planning to do so through IRFC, PFC and IIFCL Bond Issues.

Why: Influx of US$ funds from foreign investors will boost the supply of US$ and reduce pressure on the Rupee.

Sovereign Wealth Funds are funds that are owned by the Governments of various countries that invest in financial assets in foreign countries.

No. 7: Relaxing the Overseas Corporate Borrowing Rules

The Finance Ministry has relaxed the guidelines for overseas borrowing by Corporate Co.’s which will help them raise funds from overseas money markets. This is also called "External Commercial Borrowing". Under the new guidelines subsidiaries of MNC's that are operating in India will be allowed to raise money from their parent companies. Even Private co.’s incorporate in India, that are interested in raising money from overseas borrowers are being encouraged to do so. Even the State Run Oil Co.’s will be raising additional funds from offshore money markets and trade financing options.

Without considering Oil Co.’s, this relaxed guideline is expected to bring in around 2 billion US$ funds into our economy. Oil Co.’s for their part will bring in the following funds: Indian Oil - USD 1.7 billion, Bharat Petroleum - USD 1 billion and Hindustan Petroleum - USD 1 billion.

Why: Influx of US$ funds from foreign investors will boost the supply of US$ and reduce pressure on the Rupee.

No. 8: NRI Deposits

With the falling rupee, the amount of money remitted into the country by NRI's has seen a huge spurt in volumes. To tap on this opportunity the Finance Ministry has liberalized the NRI FD schemes which will likely bring in at least USD 1 billion.

The new guidelines are:

1. Incremental flows of deposits into Non-Resident Rupee Account Scheme (NRE)/Foreign Currency Account Scheme (FCNR) will be exempt from cash reserve ratio and statutory liquidity ratio requirements for Banks.
2. For NRE Deposits, the Interest rate will be deregulated for maturity periods of 3 years or more.
3. For FCNR (B) deposits of 3-5 year tenures, the ceiling on interest rates has been related to LIBOR plus 400 bps (From 300 bps)

Why: Influx of funds from NRIs will boost the supply of US$ and reduce pressure on the Rupee.

No. 9: Higher FDI limits

The Cap on Foreign Direct Investment in asset reconstruction companies has been hiked from the current 49% to 74%. This is subject to the condition that no sponsor may hold more than 50% of the shareholding in an ARC either by way of FDI or by routing through an FII. The prohibition on investment by FII in ARCs will be removed through this ruling as well.

Why: Higher capital inflows from Foreign Investors will help support the Rupee

No. 10: Measures to Reduce Forex Outflows

The RBI has announced a few measures to reduce the foreign exchange outflows by resident Indians. They are:

* The RBI has also reduced the limit for remittances made by resident individuals under the liberalized remittance scheme to USD 75,000 from USD 200,000 per financial year
* Remittances cannot be used for purchase of property outside India
* For Companies, the limit for overseas direct investments (ODI) under the automatic route for all new transactions is being reduced to 100% of net worth from 400%
* The reduced limit would also apply to remittances made by Indian companies setting up unincorporated entities outside of the country in the energy and natural resources sectors, but would not apply to ONGC Videsh Ltd, the foreign unit of Oil and Natural Gas Corp or Oil India Ltd .

Why:Lower Forex Outflows means, lower demand for the US$ in the open market and hence reduced pressure on the Rupee

Some final words:

These 10 action items by the Government and RBI seem to have a positive effect on the Rupee and the momentum is expected to be sustained over the next few weeks and bring the Rupee to its intrinsic value against the US$ as well as other foreign countries. It will also make India a favorable investment destination and help boost the Economy. As you can see, the stock market has responded positively over the past 3 days where the market has ended in Green to help Investors recover their losses...

Let us hope for the best!!!

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