The Hindu Business Line : RBI relaxes controls on dollar spend

Mumbai April 24 Splurge in dollars is the missive from the RBI in its Annual Policy statement for 2007-08, released on Tuesday, which left key interest rates unchanged.

After long years, India can afford to indulge with forex reserves crossing the $200-billion mark; some analysts may term the move towards free rupee convertibility as a necessity. Indian corporates and individuals have been allowed by the RBI to spend more dollars on foreign equity markets, acquisitions and hedging in international commodity markets. That could ease the pressure on the RBI and banks from mopping up flooding dollar inflows with rupees and limit the chances of the local currency chasing goods to lift prices.

For quite some time now, forex flows have stranded RBI, as buying dollars added to the sum of rupees while keeping off the forex market meant a sharp rupee appreciation against the dollar (less rupees per dollar). Foreign deposits are less welcome with the interest rate cap on FCNR(B) deposits being pruned by 50 basis points to Libor minus 75 basis points.

Individuals can now send out $100,000 ($50,000) per financial year while Indian companies can invest overseas 300 per cent of their net worth against the existing limit of 200 per cent. They can also place 35 per cent (25 per cent now) of their net worth on portfolio investment in listed overseas companies.

Hedging risks

The limit on foreign investment by mutual funds has been pushed up to $4 billion from $3 billion. Indian companies, including airlines, can hedge their price risks on metals and aviation turbine fuel in international commodity exchanges. Other companies "exposed to systemic international price risk" can also go for covering their price risks and in a way temper inflation.

Currently, residents with overseas direct investments in equity and debt are permitted to protect their exchange risk, provided the forward contracts are completed by delivery (of currency) or rolled over on the due date and not cancelled. The RBI on Tuesday tagged on the facility to cancel and rebook contracts and extended it to small and medium enterprises (SMEs).

Unzipping the dollar wallet, the RBI has given its nod for Indian companies to remit up to $10 million ($1 million) for consultancy services for executing infrastructure projects. For individuals, "a uniform period of six months" has been proposed for surrender of unspent dollars.

If the measures together do not tamp down prices, the RBI could switch on the interest meter. For the moment, the RBI prefers to pause and watch the rollout of its dear money policy.

Inflation check

Dr Yaga Venugopal Reddy, RBI Governor, would like to contain inflation in the current year at "close to 5 per cent" against 5-5.5 per cent last year. Add on the medium-term inflation target of 4-4.5 per cent, and bankers are sure of the RBI spanking any unruliness in the financial system. The RBI says: "There are indications supporting the belief that this approach has had a salutary effect on inflation expectations and the socially tolerable rate of inflation has come down. In recognition of India's evolving integration with the global economy and societal preferences in this regard, the resolve, going forward, would be to condition policy and perceptions for inflation in the range of 4-4.5 per cent. This objective would be conducive for maintaining self-accelerating growth over the medium term."

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