As EEFC deadline nears, $ 1 bn dollar inflow likely

The RBI’s latest measures which came after the rupee fell to an all-time intra-day low of 46.08 on August 11 helped the currency recover by nearly one per cent. Earlier, attempts to stem a slide in the currency by raising interest rates and squeezing liquidity had failed and compared to its January level, the currency was still off 4.7 per cent.

“The RBI’s threat to consider disallowing exporters to retain some of their earnings overseas is a bid to talk up the rupee and the facility is unlikely to be scrapped immediately,” dealers said, adding, “This has helped the rupee to strengthen, but only for the short term. I don’t think the Reserve Bank will do away with the scheme immediately.”

“These accounts were put in place when the exchange control scenario was different… when there were a lot of restrictions. But after current account convertibility this sort of comfort is perhaps not needed,” Capoor had said last week.

The RBI deputy governor’s statement followed a decision last week, halving by 50 per cent the amount retained overseas, and a directive to exporters to convert excess dollars into rupees by August 23.

Anticipating dollar inflows, the rupee has strengthened against the dollar in major cities on Monday. The rupee firmed up further to 45.662/685 to the dollar on Monday against an opening of 45.73/77. The currency had closed Friday at 45.81/82. The forex market in Mumbai was closed on Monday.

According to a section of bankers, the RBI would use the scrapping of the EEFC as a weapon the next time the rupee came under pressure. “I think the scheme will have to go, but slowly. Maybe the next time when the rupee is under severe pressure," said a banker.

Dealers said the outlook for the rupee, which is convertible only on the current account, continued to be bearish with the balance of payments (BoP) expected to be square in 2000/01 (April-March) after four years of surplus.

India’s forex reserves have fallen by nearly $ 2.4 billion from a high of around $ 38 billion in the last two months. “The RBI sold dollars from the forex kitty to prop up the rupee,” said a banker.

Several agencies, including DCR India, have criticised the measure of propping up of the currency by using foreign exchange reserves and said it has depleted the reserves rather than help firm up the rupee. Since dollar has gained against currencies of most developed countries during the period, if rupee remained stable, India’s competitiveness in export market would be adversely affected.

The demand for dollars has been mainly due to surging imports (increasing oil import bill caused by high international oil prices) rather than absolute speculation. Moreover, foreign institutional investors have pulled out funds from the Indian markets.

Sinha allays fears on balance of payments
NEW DELHI, AUG 21: Finance Minister Yashwant Sinha said today the balance of payment (BoP) situation is not a cause for concern and the government is confident of bringing down fiscal deficit to three per cent of GDP in the medium term. "The BoP is not a matter of concern though rupee has depreciated against the dollar recently," Sinha told the visiting US delegation led by Gene Sperling.

Increase in direct tax collection, introduction of FiscalResponsibility Act (FRA) on the downsizing of the government on the recommendations of Expenditure Reforms Commission is going to help the government in bringing down the fiscal deficit.

Sperling, who is heading the high level Indo-U.SCoordinating group for trade and economic issues, said the I.T revolution in India has made his country look towards India with more interest and seek a long standing friendship. PTI Ram SUD sk GKN MSA 08211850 B