The Hindu Business Line : RBI eases forex reserves use

Economic liberalisation
Access to overseas markets by banks made easier
Corporates allowed to raise an extra $250 million in ECBs
Wealthy Indian permitted to freely remit up to $50,000 per year
Mutual funds allowed to invest $3 billion overseas

Watchful stance: The RBI Governor, Dr Y.V. Reddy, announcing the Credit Policy in Mumbai on Tuesday. -- Shashi Ashiwal

Mumbai , Oct. 31

To the immense relief of the financial markets and corporates, the RBI today signed off measures to ease use of the $166-billion forex reserves and support the 8 per cent economic growth by leaving key interest rates untouched.

The wealthy Indian can now freely remit up to $50,000 per year against the earlier limit of $25,000.

The present facility of $10,000 per year for private travel will continue on a self-declaration basis.

For others not so wealthy, retail loans should not cost more as banks have little reason to mark up interest rates.

Acting on the suggestions of an Internal Task Force set up to study the Tarapore report on Fuller Capital Account Convertibility:

The RBI has allowed all categories of exporters to retain 100 per cent of their forex earnings in their Exchange Earner's Foreign Currency (EEFC) accounts.

Access to overseas markets by banks has been made easier. Banks can borrow from their overseas branches and correspondent banks up to 50 per cent of their unimpaired Tier 1 capital or $10 million, whichever is higher, as against the earlier limit of 25 per cent.

Corporates can raise an extra $250 million in External Commercial Borrowings (ECBs) over the existing limit of $500 million under the automatic route, in a financial year.

Prepayment of ECBs up to $300 million (earlier cap of $250 million) without reference to the central bank has also been okayed.

To help Indian companies move abroad, the RBI has lifted the limit on credit and non-credit facilities extended by banks from 10 per cent to 20 per cent of their unimpaired capital.

Mutual funds can now invest $3 billion ($2 billion) overseas.

FIIs' investment in g-secs

Speaking to the press, the RBI Governor, Dr Y.V. Reddy said, "As we liberalise the economy and make capital account convertible, we have to be more careful."

In the long term, debt markets could buzz with activity, with FIIs permitted to invest more funds in government securities above the current $2-billion cap. Accordingly, the existing limit will be raised in phases to $2.6 billion by December 31 and further to $3.2 billion by March 31, 2007. The $1.5-billion bind on corporate debt will continue.

In the Mid-Term Review of Annual Policy Statement for 2006-07, the RBI Governorseemed a trifle less allergic to speculation in the debt and forex markets. Short sales (selling without holding securities physically) have been allowed by banks and primary dealers (and not FIIs) with the proviso that short positions will have to be covered (buying securities to honour sales made earlier) within five days.

Intra-day shorting was permitted in February 2006.

In tandem, FIIs can rebook 25 per cent of cancelled forward contracts to bet on rupee-dollar volatility.

Repo rate hiked

The repo rate (the rate at which RBI lends money to banks) has been marked up by 25 basis points to 7.25 per cent, but that should not make any difference as banks have not been frequent visitors at RBI counters.

"It will have no immediate and direct impact,'' said Dr Reddy.

"We expect the banks to rebalance their portfolio and reassess their policies to avoid any contingencies. In the current circumstances, liquidity may be more expensive in the future. We have urged banks to rebalance their credit-deposit ratio."

Banks, in turn, should be under less pressure as the last date for complying with tough Basel II norms has been extended.

"Globally, there is no time fixed for the migration," remarked the RBI chief.

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