| Further curbs on overseas borrowings and more easing of capital outflows are expected even as the Reserve Bank of India (RBI) seeks to manage the pace of the rupee's appreciation in the face of swelling inflows.
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| The likely curbs on inflows could be in the form of reduction in interest rate banks can offer on deposits by non-resident Indians (NRIs) and also by extending the minimum tenure of external commercial borrowings.
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Banks are now allowed to offer interest on NRI deposits at LIBOR (London inter-bank offered rate), which was reduced from LIBOR plus 50 basis points in April 2007.
| FOREIGN INVESTMENT FLOWS TO INDIA | | Item | '03-'04 | '04-'05 | '05-'06 | '06-'07P | | A. Direct Investment (I+II+III) | 4,322 | 6,051 | 7,722 | 19,531 | | I. Equity (a+b+c+d+e) | 2,229 | 3,778 | 5,820 | 16,065 | | a) Government (SIA/FIPB) | 928 | 1,062 | 1,126 | 2,156 | | b) RBI | 534 | 1,258 | 2,233 | 7,151 | | c) NRI | "� | "� | "� | "� | | d) Acquisition of shares | 735 | 930 | 2,181 | 6,278 | e) Equity capital
of unincorporated bodies | 32 | 528 | 280 | 480 | | II. Re-invested earnings | 1,460 | 1,904 | 1,676 | 2,936 | | III. Other capital | 633 | 369 | 226 | 530 | | B. Portfolio Investment (a+b+c) | 11,377 | 9,315 | 12,492 | 7,003 | | a) GDRs/ADRs | 459 | 613 | 2,552 | 3,776 | | b) FIIs | 10,918 | 8,686 | 9,926 | 3,225 | | c) Off-shore funds and others |
"� | 16 | 14 | 2 | | C. Total (A+B) | 15,699 | 15,366 | 20,214 | 26,534 | | P : Provisional Figures in $mn |
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Companies are now allowed to borrow for three years at a maximum spread of 150 basis points above LIBOR and for five years at a maximum spread of 250 basis points above LIBOR.
| INDIA'S DIRECT INVESTMENT ABROAD | |
Industry | 2003-04 | 2004-05 | 2005-06* | 2006-07* | | Manufacturing | 893 | 1,068 | 2,933 | 1,913 | | Financial Services | 1 | 7 | 159 | 21 | | Non-Financial Services | 456 | 283 | 881 | 7,382 | | Trading | 113 | 181 | 361 | 613 | | Others | 31 | 108 | 195 | 1079 | | Total | 1,494 | 1,647 | 4,529 | 11,008 | * : Based on the latest reported revised data. Therefore, these may
differ from the data earlier published as part of balance of payments.
Note : Data include equity and loan components.
Figures in $ million |
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| Further measures on both inflows and outflows are seen because foreign exchange inflows are likely to continue at a brisk pace, outstripping outflows and also the liberalisation of capital account outflows by the RBI yesterday are expected to have some impact only in the medium term. Net capital inflows into the country rose from $23.4 billion in 2005-06 to $44.9 billion in 2006-07 and about 81 per cent of this was non-FDI (foreign direct investment) inflows.
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| The surge continues with net portfolio equity inflows of $9.5 billion since April this year, resulting in a sharp 10 per cent rupee appreciation in 2007.
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| The rupee has appreciated to Rs 39.70 per dollar from Rs 40.49 on September 18, the day the US Federal Reserve cut its key rates by 50 basis points to prevent an economic slowdown due to the impact of the subprime mortgage crisis.
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| Abheek Barua, chief economist at HDFC Bank, said "the rising rupee is a deep concern for the RBI. The day-to-day market intervention is not working very well. We are likely to see the limits on capital outflows enhanced (again) and also (more) curbs on inflows,''
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| Net capital inflows into the country rose from $23.4 billion in FY06 to $44.9 billion in FY07 and about 81 per cent of this was non-FDI (foreign direct investment) inflows (Figure 1). The surge continues with net portfolio equity inflows of $9.5 billion since April this year, resulting in a sharp 10 per cent rupee appreciation in 2007.
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| "Clearly, excess capital inflows are causing a dilemma for the RBI as it has been resisting rupee appreciation by intervening in the foreign exchange market and sterilising the inflows. However, sustained intervention comes at a high sterilisation cost and at the risk of losing monetary autonomy. We expect the RBI to take a middle-road approach of allowing some rupee appreciation but managing its pace, continuing to mop up liquidity and further encouraging capital outflows," a note by Lehman Brothers on RBI's easing of capital outflows said.
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| Lehman Brothers also expects further hikes in cash reserve ratio (CRR) "� the proportion of deposits banks have to keep with the RBI "� to mop up liquidity and also maintained its call of the rupee rising to Rs 39 per dollar by the end of 2007 and to Rs 36 by the end of 2008.
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| "The banking system is flush with liquidity. We could see the central bank enhancing the quantum of MSS (market stabilisation scheme) absorptions. If the RBI does not increase the MSS limit by next week, then the market should be ready for about 50 basis points hike in the cash reserve rati," said Barua.
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| He, however, said since hiking the CRR would be viewed as a strong monetary step and it has interest rate implications, the RBI could opt for increasing the MSS limit.
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| The current ceiling on MSS issuances is Rs 1,50,000 crore with the threshold for its review at Rs 1,35,000 crore. The threshold has almost been reached with today's Rs 15,000 crore of treasury bill and bond auctions taking the total MSS outstanding to Rs 1,34,940 crore. |
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