For the love of the rupee

Despite the rupee moving in a relatively sedate band over the last four months and the current account deficit declining to $45 billion for this fiscal, it is apparent that the Finance Ministry is not yet easy on these parameters.

The Finance Minister listed a few proposals, ostensibly to deepen the financial markets, in his interim Budget speech. But a closer look reveals that all of them are aimed at bolstering the rupee and the country’s foreign exchange reserves. The FM’s promise to comprehensively revamp American Depository Receipts and Global Depository Receipts appears aimed at helping companies raise capital from overseas investors, while boosting forex inflows into the country.

However, the relatively lenient rules governing GDRs have made many small companies misuse this route. In 2010, SEBI had punished companies including Asahi Infrastructure, IKF Technologies, Avon Corp, K Sera Sera, CAT Tech, Maars Software and Cals Refineries for using GDR proceeds to manipulate stock prices.

It is of concern that no GDR or ADR issues have been made in recent years. Resuscitating this route at the current juncture when appetite for equity is much more robust in developed markets makes immense sense.

The Finance Ministry may review the rules for the end-use of funds and the time limit for repatriation. Need for two-way fungibility in depository receipts might also be reconsidered.

In the wake of the sharp decline in the rupee between last June and August, the Reserve Bank of India had asked banks not to trade in their proprietary account in the currency derivative segment. SEBI had also increased margins and position limits in currency derivatives, thus effectively throttling this sector.

Pursuant to these moves, average daily turnover in currency futures on the National Stock Exchange has decreased to ₹8,400 in February this year, from around ₹24,500 in April 2013.

The statement of the FM that the currency derivatives market needs to be deepened reflects an intent to roll back the measures taken last June to curb excessive rupee speculation. Investors in currency futures could be given the option of either taking physical or cash on delivery. The proposal to allow FIIs to trade in currency derivatives could also finally be implemented.

The pronouncement regarding liberalisation of rupee-denominated corporate bond market could signal relaxing or even completely doing away with the limits on FII investments in these instruments.

This could precede doing away with the restrictions on FII investments in Government securities too, since this factor is seen as an impediment to including Indian G-Secs in international bond indices.

Smoother clearing of settlement for international investors in Indian bonds can be linked with the news that Government officials were recently in talks to use the services of Euroclear, a Belgium-based financial services company for settlement and clearing of bonds traded by foreign investors. All towards attracting more foreign funds.