Steps to attract foreign inflows in the offing: Rajan

No additional measures needed to curb gold imports

As rupee touched a record low of 58.96 to a dollar, the finance ministry said measures would be announced shortly to encourage portfolio investor inflows. To narrow down the current account deficit, it will also take proposal to the Cabinet for raising foreign direct investment ceiling in various sectors.

“In the coming weeks, we will recommend to the Cabinet policies to enhance FDI limits on number of areas all this will help not just in short-term objective of financing CAD safely but also in the longer term objective of ensuring sustainable growth,” Chief Economic Advisor Raghuram Rajan told reporters.     

Defence and telecom are the two key sectors where the government is looking at raising the ceilings from 26% to 49% and from 74% to 100%, respectively. The Cabinet has already approved hike in insurance cap to 49%, but a bill to that effect is pending in Parliament.

Rajan said there has been some volatility in financial markets in the last few days and the government, RBI and SEBI would take actions as warranted, but ruled out any additional measures for curbing gold imports, adding the recent measures taken by the government and RBI would be sufficient.

Economic Affairs Secretary Arvind Mayaram said a high CAD was bothering the government but there has been a major reduction in off-take for gold in the last one week.

Gold imports on the first 13 business days till May 20, 2013 averaged $135 million a day. However, in the 14 subsequent days till Friday of last week, the imports averaged only $36 million. The government recently hiked customs duty on gold to 8% while RBI has put restrictions on banks to import gold.

“Oil prices remain low, and exports are picking-up. Also, some of the constraints on our exports of items like iron ore are alleviating, even while substitute imports such as scrap iron will abate. So there is good reason to believe that the process of narrowing of CAD will continue over the next few months,” he said.

India's CAD touched a record high of 6.7% of GDP in December 2012 quarter and is likely to be around 5% during the last fiscal.

The exchange rate has depreciated about 5.5% since January 1, 2013, which is at par with Korea, Turkey and Brazil and much less than South Africa. The decline in the rupee is 7.5% since May 1. India has received $4.162 billion in equity flows, and lost 486 million in debt outflows.

Mayaram said the rupee fall is a temporary phase and the government was not unduly disturbed by it. He said the domestic currency will stabilise in the next 3-4 days with large foreign fund flows. “This is simply a correction. Our indication is some of the FIIs are now poised to bring in large funds.”

The government may also come up with NRI bonds to attract overseas funds. It had earlier raised funds through India Development Bond (IDB) of 1991, Resurgent India Bonds (RIB) in 1998 and India Millennium Deposits (IMD) in 2001.    

“We will be looking at all options for safe financing of CAD.... It is still early days," Rajan said.

Highlights

<sup>* Govt, RBI, Sebi to take “warranted” action to stem Re volatility

* Rupee to stabilise in next 3-4 days with large foreign flows

* Additional measures for curbing gold imports ruled out

* Demand for forex to buy gold came down in last 5-7 days</sup>

* Govt will enhance FII limits to ensure safe CAD inflows

* Cabinet to soon consider raising FDI limit in various sectors

* Low oil prices and pick up in exports to help narrow CAD

* NRI bonds could be considered to raise forex reserves