Even a week after the Reserve Bank of India (RBI) asked Exchange Earners Foreign Currency (EEFC) account holders to convert half their dollar funds into rupees, the measure has not yielded the desired results. This has prompted the central bank to seek data from banks on how much individual companies have converted till now. Such account holders had been given 15 days to meet the requirement.
The move was expected to bring in about $2.5 billion worth of foreign currency which would help bridge the dollar shortfall in the spot currency market. "No large flows have been seen from these accounts in the market as yet. Probably, people are waiting on the sidelines for better rates," said a senior treasury official of a private sector bank.
In the circular dated May 10, EEFC account holders have a week more to follow the mandate. "We may see flows now if 54 per dollar levels are lucrative enough," added the official.
On Wednesday, the rupee closed at an all-time low of 54.5 against the dollar, two per cent lower since the notification by RBI. It is expected to fall further due to fresh developments in the euro zone area. "The outlook for the rupee is for gradual weakness to 55.35-55.65, not ruling out extended run into 56.30-56.75 before sharp reversal into 52-51," said Moses Harding, head, economic & market research at IndusInd Bank.
Meanwhile, the central bank clarified on Wednesday that only the earmarked amounts of forward or option contracts booked before May 10 will be taken into account.
RBI had also increased interest rates on various deposits for non-residents to attract foreign currency flows. "There was some increase in foreign currency flows through NRI deposits when interest rates were increased in December. The spurt has come and gone. Now, there are steady flows in both rupee and foreign currency deposits," said Ajay Marwaha, executive vice-president and head of trading at HDFC Bank.
Though this has not increased the cost of funds for banks when compared to rupee deposits, it would result in increase of foreign liabilities for Indian banks, a banking analyst with a domestic brokerage said. More such steps may be in store as RBI tries to smoothen the volatile rupee-dollar market.
Upasna Bhardwaj, economist at ING Vysya Bank said measures such as dollar bonds, a special window for oil companies and enhancing debt limits for foreign institutional investors may be able to curb losses in the short term. However, structural reforms and greater commitment by the government towards fiscal discipline are key to ensuring sustained gains in the rupee, she added.
A senior treasury official said RBI might ask public sector banks to take positions on its behalf for oil marketing companies to meet their daily dollar demand.
| WHAT RBI DID SO FAR… | ||
| Policy measures taken on | Likely impact | Limitation |
| EEFC Accounts | Dollar inflow of $2.5bn by May 24 | Account holders still waiting for lower level, clarifications |
| Trading limits | Reduced volatility | Banks' flexibility for handling bigger deals reduced |
| NRI deposits | Steady flow of foreign currency | Results to be seen on a medium term, Increases foreign liability of banks |
| Currency forwards | Curbed speculations | Reduced volumes, Increased hedging costs |
There is uncertainty over support from foreign investors. "Foreign investors are taking a double hit because of weakness in the currency as well as equities. Respite may be seen once the rupee traces its way back to 52-53 levels, considered the actual value as per macroeconomic factors," said Varun Goel, head of portfolio investment at Karvy Stock Broking. According to the Bombay Stock Exchange, there were foreign fund outflows of about Rs 550 crore from Indian equity markets on Wednesday.
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