The monetary policy statement indicates that the central bank is expecting sustained inflow into the country from foreign portfolio investors (FPIs). Some of the measures announced in the policy appear targeted towards controlling a runaway appreciation in the rupee as a result of these inflows.
The rupee has appreciated around 3 per cent against the dollar since the beginning of this calendar. This has happened in a turbulent environment where the dollar has been soaring and the euro crashing. The primary reason for the appreciation is strong foreign portfolio flows into Indian debt so far this year. This is thanks to the attractive real yield of Indian Government securities (G-Secs).
The RBI is, however, not too happy with an appreciating rupee as it tends to affect export realisations that in turn hurts the current account deficit.
This was reflected in the policy that said, “Export performance has been hamstrung by weak global demand conditions and the persisting fall in unit value realisations. The real appreciation of the rupee may also have had some effect.”
With the European Central Bank and the Bank of Japan unleashing fresh rounds of liquidity that can inflate asset prices further, the RBI appears set to counter these flows; albeit with a few small measures.
The foremost is the doubling of the foreign exchange remittances under the Liberalised Remittance Scheme to $250,000 per person per year. It may be recalled that the limit was reduced to $75,000 in 2013 to curb rupee depreciation. The RBI has also limited investments of FPIs in corporate bonds to instruments with residual maturity of three years.
This could result in some FPIs staying away from Indian debt, helping to check the rupee appreciation.
Tweaking the rules governing exit options for foreign direct investments also suggests that the central bank may not be too perturbed if some foreign funds move out of the country. The RBI proposes to allow these investors the option to exit at a price linked to the G-sec yield.