Reserve Bank Steps In To Rescue Rupee

In a sudden move to curb volatility in the foreign exchange market, the Reserve Bank yesterday hiked the repo rate by an unprecedented three percentage points to eight per cent, raised the cash reserve ratio to 11 per cent from 10 per cent with effect from August 29 to suck out Rs 5,200 crore from the system and introduced fresh curbs for booking and cancelling forward contracts.

Other measures to stop the rupee from depreciating beyond its all-time low of 43.67 on August 19 include allowing foreign institutional investors to book forward cover to the extent of 15 per cent of the investment upto June 11, 1998, not extending the time limit for repatriation of export receivables, except in special cases and putting in place a daily reporting system of peak intra day positions of banks.

 

The RBI has also relaxed the export earners foreign currency (EEFC) account scheme by allowing all business-related payments to be made out of it at the discretion of the exporter. However, the apex bank has warned that wilful delays in repatriation of export proceeds will result in the withdrawal of the EEFC account facility of the offending exporter.

Top Reserve Bank official state that the steps were taken to break the built up expectation of a rupee depreciation and was needed in the context of weak domestic economy, volatile international market and poor capital inflows. The steps which are similar to the ones taken on January 16 are aimed at tightening liquidity and increasing the rupee interest rate and thereby making it difficult to punt against the Indian currency.

The RBI which called for data from banks discovered that inter bank transactions were less than 10 per cent of the total transactions, indicating that corporates were punting against the rupee. It also found that there is no demand and supply problem and most deals though not speculative were not transaction oriented.

The RBI scrutiny also revealed that there was a lot of booking and cancelling of forwards just to make rupee profits from the depreciation.

With actual trade being limited, the Reserve Bank took the liquidity tightening measures to calm the forex markets.

In a press note, the RBI said, "as a temporary measure to absorb excess liquidity, the CRR is being increased to 11 per cent from 10 per cent effective August 29, 1998." The Reserve Bank also said that the hike in repos rate to eight per cent from five per cent will be reviewed periodically keeping in view the liquidity conditions.

With effect from June 11, 1998 FIIs were permitted to take forward cover for the incremental investments only. Now RBI has allowed FIIs to take forward cover upto 15 per cent of the value of their investment as on June 11, 1998.

At present rebooking of cancelled forward contracts is not allowed for non trade transactions while it is allowed for trade related transactions.

Now RBI has withdrawn the facility of rebooking cancelled contracts for trade related transactions covering imports.

However, the contracts can be rolled over on or before maturity. The facility for rebooking cancelled contracts for export will continue.

In 1993 corporates were allowed to cover their forward commitment by first locking into a forward rate and thereafter covering the spot.

RBI states, "however instances os misuse f the caility have come to the notice of RBI where corporates have booked and cancelled the spot leg of the transaction without first locking into the forward leg." Hence the RBI has withdrawn the facility for splitting forward and spot legs for a commitment.

Giving in to the demands of the exporting community, Reserve Bank has allowed then use funds in the EEFC accounts for all business related payment abroad as well as in India. It is also advised exporters that to the extent possible balances available in EEFC accounts should be used effecting payments abroad. RBI has also advised exporters not to dealy repatriation of export proceeds beyond the due date. "Applications for extension of time limit will be considered only in exceptional cases where the delay is on account of external circumstances beyond the control of the exporter, " the RBI press note said.

RBI has also ordered authorised dealers to report at the close of business everyday their open position as at 10 a.m. as also their peak intra day position.