In name of saving rupee,RBI brings controls back

In a bid to check the drain on foreign exchange reserves,the Reserve Bank of India (RBI) has brought back partial capital controls that had been progressively reduced from 2004 onwards

Written by ENS Economic Bureau | Mumbai/ New Delhi | Updated: April 8, 2014 5:57 pm

In a bid to check the drain on foreign exchange reserves,the Reserve Bank of India (RBI) has brought back partial capital controls that had been progressively reduced from 2004 onwards.

RBI on Wednesday banned Indians from investing in property overseas,cut the amount of foreign exchange they may use to travel or invest abroad from the current annual ceiling of $ 200,000 to $ 75,000,and stopped the import of gold coins and medallions. The measures will come into effect immediately,the RBI said in a notification.

But foreign exchange analysts said most of these measure were unlikely to be of help to the central bank as it attempts to conserve dollar resources to defend the rupee and cut the current account deficit. In FY ‘13,Indians took out only $ 1.2 billion as foreign remittances,minuscule compared to total forex reserves of over $ 258 billion (excluding gold). They spent a mere $ 77 million on property abroad.

Indranil Sengupta,chief economist with Bank of America Merrill Lynch,said,“We expect the RBI to instead take more proactive measures to stablise the rupee.” Options include floating either a sovereign or a non-resident bond to gather dollars,he said.

RBI also imposed further restrictions on gold imports,including a requirement that 20 per cent of each consignment should be earmarked for exports. It banned import of gold coins and medallions altogether.

Arvind Mayaram,economic affairs secretary in the finance ministry,told reporters that more such steps were in the offing. “Throughout the year,we will calibrate policies to create a stable environment for the rupee,” he said.

RBI reduced the automatic limit for direct investment by Indian companies overseas. Indian companies will now need prior approval from RBI to buy a firm abroad or make a greenfield investment if the sum is more than 100 per cent of its net worth. It reverses the relaxation in automatic investment that had been eased to 400 per cent by 2007.

India Inc. had stepped up investments abroad over the last two or three years. In FY ‘13,Indian companies invested over $ 13 billion abroad.

Commenting on the decision,Nomura economist Sonal Varma said,“While the authorities aim to reduce forex volatility,we fear that they may end up sending a panic signal. With gross capital inflows not in its control,the RBI is trying to tighten the noose around resident outflows.”

RBI said the reduction in limit for overseas investment would not apply to Navratna PSUs and companies making investments in the oil sector. “The present set of measures is aimed at moderating outflows. However,any genuine requirement beyond these limits will continue to be considered by RBI under the approval route,” the bank said.

The liberalised remittance scheme for individuals was rolled out in 2004,and expanded gradually to allow people to buy property,shares or debt instruments or any other assets outside India,without needing RBI’s prior approval.

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