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Sunday, Dec 22, 2002

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One more cautious step towards convertibility

R. Janakiraman

ENCOURAGED by the swelling foreign exchange reserves and a fairly stable domestic forex market, the Reserve Bank has taken one more cautious step towards convertibility of the rupee.

The forex kitty has been hitting new record highs almost every week in the recent past and stood at $65.125 billion on December 13. In the last nine months, the accretions have been sizeable at $14.076 billion. Pressure has been building on the central bank to liberalise exchange controls and Friday's announcement comes as a bold and, understandably, cautious step towards convertibility.

Cautious because this dose of freedom is presently available for the next three months only. Hopefully, if the stable conditions continue and there is no sizeable drawing down of the reserves, the Reserve Bank may find its way to allow these facilities to stay on the rule book on a regular basis.

The relaxations announced now can be looked at from the angle of the beneficiaries. First comes the freedom extended to the non-residents now to obtain forward cover for their FDI investments in India since 1993.

There has been a persistent demand for this facility on the ground that the slack inflows of FDI could be quickened if forward cover is made available. So far, such cover had to be obtained with the specific permission of the Reserve Bank on a case-by-case basis.

Next come the measures that will help the customers. These are in the nature of enlarging the existing limits. Customers can now look to the banks to provide them forex-rupee swaps to hedge their forex liabilities. There is no limit now as against the previous rule that a bank could access the market only up to $50 million for offering the product.

Secondly, exporters and importers can now book forward contracts up to a cap of $100 million outstanding (as against the earlier limit of $50 million), without production of documents but on the basis of the past three years' turnover.

Thirdly, corporates will now have the freedom to rebook cancelled forward contracts falling due within one year. Previously, this facility was available only up to a limit of $100 million in any financial year.

The Mint Road Santa Claus has brought some goodies for the banks as well: Foreign banks in India were so far required to space their hedging requirements for their Tier-I capital over six months.

This spacing requirement has now been withdrawn and these banks are free to go in for hedging as and when they deem it appropriate.

The Indian banks have also been given the freedom to invest in the overseas markets any amount as their boards may permit them to do.

Earlier, they could invest only up to 50 per cent of their unimpaired Tier-I capital or $25 million, whichever was higher.

This facility requires close monitoring at the banks' head office level in view of the inherent risks involved.

Overall, the new liberalisation measures will benefit the exporters, importers, corporates, foreign investors and, of course, the banks: ultimately, more business means more profit opportunities for the banks!

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RBI lifts forex swaps cap


One more cautious step towards convertibility
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