Rbi Gets Tough To Prop Up Rupee

In a move that could release almost $1 billion in the foreign exchange market within a week, the Reserve Bank of India has asked corporates to liquidate half of their dollar balances lying in exchange earners foreign currency accounts. In an instruction to authorised dealers yesterday, the RBI said corporates must complete the 50 per cent selloff by August 23. Further, the central bank said the EEFC limits now stand truncated to 50 per cent of earlier limits. That is, while earlier exporters could keep 50 per cent of their export proceeds in EEFC accounts, they will now be allowed to keep only 25 per cent. As a result of the 50 per cent selloff rule, 100 per cent export oriented units, companies in export processing zones and software and hardware technology parks, can credit only 35 per cent of their total export earnings to their EEFC accounts compared with 70 per cent earlier. RBI said such EEFC accretions have to be maintained in current and savings accounts whereas earlier they were allowed to be held in term deposits as well. Last Friday, governor Bimal Jalan had said the central bank was considering such a move to augment dollar supplies in a bid to shore up sentiment on the rupee. The RBI circular said about $2 billion are held in the EEFC accounts and most of these balances were kept "idle" in current and savings accounts. It has asked authorised dealers, mostly banks, to scale down these balances to 50 per cent of the levels as on August 11. The excess over 50 per cent has to be converted into rupees by August 23. Where the amounts are held in term deposits, the excess amount may be sold forward by the depositor to coincide with the maturity date of deposit. RBI has also barred banks from offering credit on the basis of EEFC accounts till further notice in a bid to halt the slide in the rupee. The central bank has also asked banks not to provide credit ""either fund or non fund based ""against such accounts till further notice. Existing facilities however have been allowed to continue till the maturity of existing contract. No extension of the time limit has been permitted for repayment of the existing credit facilities. The RBI has also said EEFC balances can only be held in the form of savings or current accounts. Currently EEFC accounts can be held in the form of current, savings or term deposits. The EEFC Accounts Scheme was introduced in 1992, which enabled exporters of goods and services to retain a portion of their receipts in foreign exchange with an authorised dealer in India. The central bank has said with the introduction of the Foreign Exchan- ge Management Act on June 1, 2000 and the rupee becoming fully convertible on the current account, the EEFC scheme is under review. The latest set of measures have been issued pending such a review. The measures did not come as a surprise to the corporates. Said DD Rathi, senior vice-president and chief financial officer of Grasim: "It has been a reasonable move on the part of the lContinued on Page 10 central bank to curb the volatility in the rupee. It will definitely benefit the rupee in the short term and with the limits for the companies further cut, it should ensure a steady supply of dollars into the market and curb the speculation. This may also be looked at as a counter productive measure by the RBI,in terms of its intervention but will in the short run curb the volatility." According to N S Paramsivam, vice president, treasury, Essar Group, the move will increase the supply of dollars in the market. It will help stabilise the rupee in the short and medium term, he said but one cannot say about the long term effects." Bankers also were not too surprised. Said Aok Sharma, chief dealer foreign exchange, Bank of America: "this measure has been on the anvil and does not come as a surprise. This should increase the supply of dollars in the market." Continued Ravi Pai, vice president treasury, head of foreign exchange trading and derivatives, HDFC, " exporters who were holding onto the dollars in lieu of a weaker rupee were compunding the problem. This measure should take care of that, with the short term supply taken care of. For the medium and long term effects , we will have to wait and watch.