| |
| In order to take advantage of prevailing higher interest rates across instruments in the system, foreign exchange inflows have been pouring into the system unabated taking the forex reserves above $90 billion. |
| |
| In turn, the usage of dollar funds have decreased as importers do not want to take forward cover to hedge their risks arising from currency risk as rupee is appreciating. |
| |
| On the other hand, the Reserve Bank of India (RBI) has to intervene to curb the direct impact of the forex inflows on the rupee dollar exchange rate by buying dollars. |
| |
| While this is helping to avoid sharp appreciation of rupee which will hurt exporters but rupee liquidity to that extent is growing . Further, dollar loans taken by corporates are being brought into India and converted into rupees, which is adding to the liquidity. |
| |
| Therefore, attempts are being made to increase dollar funds exposure abroad, which will put some pressure on the rupee and curb volatile short-term inflows purely heading towards India for interest rate arbitrage. |
| |
| The April 2003 review of the monetary & credit policy permitted Indian corporates to invest in rated bonds and fixed income securities of listed companies abroad and allowed overseas investors to make long-term investments to hedge their forex exposures in India by entering into forward sale contracts with banks in India. |
| |
| Further, entities with transactions denominated in foreign currency but settled in rupees were allowed to book forward contracts and non-resident Indians/overseas corporate bodies to book cross currency forward contracts to hedge the balance sheet held in their FCNR(B) accounts. |
| |
| This was followed by a spate of current account liberalisations whereby the ceiling on spending abroad in employment, emigration, maintenance of close relatives, education, medical treatment etc were raised. |
| |
| Further advances to be remitted by the banks towards import payments without bank guarantee was also raised and Indian citizens employed abroad were permitted to open foreign currency account with banks overseas. |
| |
| The most recent has been the increase in the amount of Exim Bank financing to project exports. However, since September, the other mechanism was adopted whereby loopholes were plugged to curb arbitrage inflows. |
| |
Interest rates on non-resident external (NRE) deposits saw two rounds of cuts
|
