NEW DELHI: The rupee’s alarming plunge and the central bank’s limited and depleting armoury to stem the fall have jolted the government into coming up with a comprehensive policy package. According to top government sources who do not wish to be identified, several measures to boost dollar liquidity are likely over the next few days.
Oil marketing companies, whose dollar requirement is the highest among all importers, and in whose case a deferment of purchase is hardly an option, might again be allowed to buy greenbacks directly from the central bank, a facility that was last put in place in January. This will make the spot markets for dollar less crowded and help other importer buyers of the American currency.
Further, the sources said, gold imports would be discouraged further without putting any extra physical barriers. For this, financial savings options – mutual funds and insurance among others – will be bolstered with decisive policy action.
The prime minister’s office and finance ministry, which in recent days discussed the issues arising out of the weak rupee and its adverse impact on capital flows and corporateIndia’s foreign obligations, have resolved to ask the market and insurance regulators to announce steps to make these financial savings products more attractive, sources said. They added that although there are no plans to put further physical barriers on gold imports like any increase in duties or quantitative ceilings, the lure of the metal as safe-haven investment could still wane if alternative savings avenues are enhanced.
The investors’ preference for gold has already affected these savings options with net outflows from sundry mutual fund schemes for the last several months and a growth decline in the insurance segment.
According to the sources, policymakers have also discussed further steps to ease ECB and FCCB inflows, besides allowing companies more leeway in FCCB repayments. Several companies’ stocks are trading below the conversion price right now, while FCCBs amounting to approximately $7 billion are slated for conversion in 2012-13.
Besides, sources said, the government was also set to take some reform steps in the executive domain like easing FDI rules for aviation and retail immediately after the Parliament session ends on May 22. Confirming this, commerce and industry minister Anand Sharma told FE that the forthcoming review of foreign trade policy would include additional incentives for exporters, although the fiscal implications of these are expected to be marginal.
The rupee on Friday gained 5 paise to close at 54.42 against the dollar with RBI’s swift action pulling it back from 54.91 touched in early trade.
Gold import tariff – which was doubled to 4% in the Budget 2012-13 – has helped reduce the demand volume, although high prices almost offset the extent of fall in import value. Bullion imports stood at a record $58 billion in 2011-12. The prime minister’s economic advisory council had forecast that gold imports this year would be lower by 34%. While in value terms demand fell 3% in the quarter through March, the volume dropped 29% to 207.6 tonne. As per the April trade figures, gold imports fell 33% while other precious metal fell by over 60%.
Gold imports added substantially to the current account deficit (CAD), taking it to a record level of 4.3% of the GDP in 2011-12, causing concern over the outflows due to investor preference for this idle asset. The rupee’s consistent, headlong slide over the last few weeks has threatened to aggravate the CAD, in what looks like a vicious cycle. Of course, some part of good imports are used for value-added exports and to that extent, the adverse impact of the surge in import of the metal on the current account is mitigated. “Import content in gems and jewellery exports is around 90%,” noted Ajay Sahai, director-general, Federation of Indian Export Organisations.
The government feels mutual fund, insurance schemes and hybrid products including united linked insurance (Ulip) products could be packaged in more attractive ways to inspire investor confidence. The idea is to facilitate a shift away from gold when it comes investor preference.
The government’s new initiatives could be seen in the context of the RBI sticking to its stance that as far as exchange rate is concerned, its mandate is to address volatility and not chart the direction of the currency’s movement. This has shifted the onus of policy intervention in the matter more towards the government.
For the fourth consecutive month, equity mutual funds saw outflows of Rs 455 crore in April, preceded by Rs 196 crore in in March, Rs 2,680 crore in February and Rs 456 crore in January. Liquid and money market funds too witnessed huge inflows of Rs 75,752 crore in April. In March, these funds saw outflows of Rs 76,537 crore as tight liquidity and the need to balance the books for the fiscal year-end prompted banks and corporates to pull out money. Balanced funds and gilt funds too witnessed outflows in recent months.
Shubhada Rao, chief economist at Yes Bank observes that if the RBI does open a special window for oil marketing companies to buy dollars, it would no doubt take pressure off spot markets. “To that extent, there would less of a mismatch between demand and supply and the volatility would be smoothened. We have been expecting this for some time,” Rao says. Market observes say forex markets did see relatively less volatility when the central bank opened a special window for oil marketing companies in 2008.
PK Goel, director-finance, Indian Oil (IOC) said: “Whatever gain we may have from the recent decline in crude prices is largely offset by the weak rupee. The net gain is fairly immaterial.” IOC’s crude import bill stood at $40 billion in 2011-12.
Stating that a mismatch between the CAD and capital flows were impacting the rupee adversely, the prime minister’s economic advisory council chairman C Rangarajan recently said there was a need to take steps to spur when FII investment in both equity and debt, besides promoting FDI. Rangarajan had met the Prime Minister Manmohan Singh on Wednesday and discussed these issues.
MENU 