Financial Daily from THE HINDU group of publications
Sunday, Dec 22, 2002
RBI & Other Central Banks
Money & Banking - Forex
RBI lifts forex swaps cap
MUMBAI, Dec. 21
IN what is being perceived as passive intervention by the central bank to check further appreciation of the rupee, the Reserve Bank of India today announced a slew of forex relaxations.
The measures include allowing banks to offer unlimited foreign currency-rupee swaps to their customers, raising the limits for booking forward contracts up to $100 million and removing the cap on banks' investments in overseas debt markets.
These relaxations, seen as a bid to create demand for the greenback, would be in force till March 2003, subject to subsequent review, RBI said in a press release.
Bankers are circumspect whether these measures will help create demand for the dollar given the heavy inflows, the steady appreciation of the rupee and the tepid corporate demand.
Said the treasury head in a nationalised bank, "These relaxations are likely to appeal only to a few top-end corporates who deal in large volumes and have the requisite treasury expertise to play the market. Small and medium-size corporates may not avail of these facilities as they would not want to enter into speculative activity."
Under the measures announced today, the RBI has permitted banks to offer foreign currency-rupee swaps without any limits in order to facilitate customers to hedge their foreign currency liabilities. Previously banks were permitted to access the market up to $50 million only while offering this product to customers.
Exporters and importers can now book forward contracts with a higher cap and less paper work. They can book forwards up to the extent of the average of past three years export/import turnover, without production of documents evidencing export/import subject to the condition that at any point of time the outstanding contracts shall not exceed 25 per cent of the eligible limit, subject to a cap of $100 million. Earlier, such forward contracts outstanding could not exceed $50 million.
Corporates have been given freedom to rebook cancelled contracts relating to exposures falling due in one year without any limit. For availing this facility, entities are required to furnish details of unhedged exposures to the banks. This facility was earlier available subject to a cap of $100 million per financial year.
Non-resident entities are now permitted to freely avail of forward covers in respect of amounts deployed in India after 1993, by way of foreign direct investment. There is no need to seek RBI's prior approval.
For furthering investment options abroad, banks have been permitted to invest any amount in the overseas money market/debt instruments. They were earlier permitted to invest up to a cap of 50 per cent of their unimpaired Tier I capital or $25 million (whichever is higher).
However, most bankers contend that even the existing limits remain untouched today as the return on investments overseas are unattractive with interest rates crashing globally.
The RBI also permitted foreign banks operating in India to hedge their Tier I capital at their discretion. Previously they were required to spread the hedging requirement over a period of six months.
"It is very difficult to gauge the impact of this measure, since hedging of the Tier I capital for foreign banks was only permitted a month back. Whether banks are availing of this or whether this measure will step up demand for forwards is anybody's guess," said Mr M.R. Madhavan, Currency Strategist, Bank of America.
Bankers believe that these measures would create demand, only if the rupee were to reverse the trend and start depreciating. However the domestic currency scaled new highs this week to breach the psychological barrier of 48.00 against the dollar.
There is also another school of thought, which perceives these relaxations differently.
According to Mr R.V.S. Sridhar, Vice-President & Chief Dealer, (Money & Forex) UTI Bank, these measures are positive efforts to free the Indian economy of impediments and integrate it with the world economy.
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