The Reserve Bank of India on Thursday cracked down on dollar hoarding by exporters to support the domestic currency, which fell 1.3 per cent yesterday to close at a record low.
Exporters were holding on to dollars in anticipation the rupee would continue to weaken against the greenback.
In a circular issued on Thursday, the RBI has asked exporters to sell half the foreign currency in their accounts and directed all exchange earners to surrender 50 per cent of their future earnings for conversion into rupees. The rupee has lost five per cent against the greenback since the start of the current financial year.
“Fifty per cent of the balances in the Exchange Earner’s Foreign Currency (EEFC) accounts should be converted forthwith into rupee balances and credited to the rupee accounts as per the directions of the account holder. This process may be completed within a fortnight,” the RBI said.
At present, the amount held in the EEFC accounts is at $5 billion. According to the new norms, $2.5 billion will have to be converted into rupees, which is likely to boost demand for the rupee. In addition, capital markets regulator Sebi had auctioned the FII (foreign institutional investor) debt limit of $1.5 billion for government and corporate bonds on April 23.
While the money to be invested in government bonds was expected to flow into the market within 45 days of the auction, the flow of funds into corporate bonds was expected within 90 days, bankers said.
The rupee, which recovered two per cent following the RBI’s announcement, had to give up the gains later in the day as market participants were not sure if the measures were enough to check the rupee fall. The currency is caught in the middle of a widening current account deficit domestically and the euro zone debt crisis.
As a result, the rupee’s gains were capped on Thursday. It closed at 53.43 a dollar after hitting an all-time closing low of 53.83 yesterday. This was despite the central bank's foreign exchange intervention in afternoon trade. Traders said banks were seen selling dollars on its behalf at the 53.50 levels, which helped the rupee appreciate towards the end of the day.
According to latest data released by the RBI on Thursday, the central bank's intervention in the spot market was to the tune of $20 billion between September 2011 and March 2012.
The central bank also said exporters had to sell the dollars in the market after meeting their import and travel requirements instead of holding them in EEFC accounts. “This will ensure that the EEFC accounts are used purely for transaction purposes, and not for a hedging purpose. It will certainly ensure the exporters do not misuse facilities given in EEFC accounts, and they don’t keep on buying dollars in spite of having balance in their EEFC account,” said Abhishek Goenka, CEO, India Forex Advisors.
The RBI also allowed banks to take intra-day currency trading positions that are five times their overnight open position limit, a move which could ease intra-day rupee volatility by increasing market liquidity and giving banks more time to cover big orders. Previously, banks could not exceed their overnight limit, although some larger banks had already been allowed by the RBI to increase their intra-day positions.
According to market participants, on Thursday’s measures will boost the rupee in the short run as there is a quantifiable amount of inflows that will come into the market. “On an ongoing basis too, the probability of dollars getting converted into rupees is higher now as the flexibility of exporters has been reduced,” said the treasury head of a foreign bank. However, industry players said more needed to be done for sustained stability. “While the RBI's intervention to curb dollar hoarding is commendable, more needs to be done. This kind of steep depreciation of the rupee does not augur well for the economy. It will push up inflation and increase macroeconomic concerns,” said Adi Godrej, chairman, Godrej Group.