Arun Jaitley, India’s finance minister, speaks during the ET Global Business Summit in New Delhi, India (Photographer: Anindito Mukherjee/Bloomberg)  

Government, RBI Take Steps To Encourage Capital Flows, Boost Rupee

On late friday night, the government, in an effort to encourage capital flows against the backdrop of a widening current account deficit, announced that it will focus on a five-point plan that ranges from boosting foreign portfolio investor participation in the corporate bond market to easing rules on external commercial borrowings.

Finance Minister Arun Jaitley listed the five steps in a brief media meet.

  • Mandatory hedging conditions for infrastructure loans will be reviewed.
  • To permit manufacturing sector entities to avail external commercial borrowings up to $50 million with a minimum maturity of one year versus the earlier period of three years.
  • Removal of exposure limits of 20 percent of foreign portfolio investors’ corporate bond portfolio to a single corporate group, company and related entities, and 50 percent of any issue of corporate bonds will be reviewed.
  • Exemption from withholding tax for issuance of Masala Bond issues done in FY19.
  • Removal of restrictions on Indian banks’ market making in Masala Bonds, including restrictions on underwriting of such bonds.

“The announcements should be seen as enablers to fund flows,”Jayesh Mehta, treasurer at Bank of America-Merrill Lynch, said to BloombergQuint. The decision to remove withholding tax on masala bonds could help that market, he added

“The removal of 20 percent concentration limit on FPI holdings will aid flows. The reviewing of hedging requirements for infrastructure External Commercial Borrowings will help bring down costs for these companies making them more lucrative compared to domestic borrowings.”

Broadly, it is positive that no drastic measures have been announced. The rupee, post this, should move in line with global peers but this should end any under-performance of the rupee.
Jayesh Mehta, Treasurer, Bank of America-Merrill Lynch

Two other bankers said, on the condition of anonymity, that the measures could have some positive impact but will not result in any huge shift in fund flow patterns nor give any significant relief to the rupee. They can possibly make an impact when the global markets calm down and the view towards emerging markets improves, one of them said. At that time, it could help in easier refinancing, he added.

The outcome of the plan would depend on the inflow of short term debt, according to Abheek Barua, chief economist at HDFC Bank said. He pointed that there might not be enough appetite for masala bonds right now. “Just opening these channels might not bring adequate dollars and maybe it will have a marginal impact,” Barua said. “Some of these measures could address the funding requirements in the long term and could help in stabilising the rupee, but the impact would be marginal.”

Devendra Kumar Pant of India Ratings and Research called it a “short-term currency booster” for the market. He said the move is unlikely to give a long-term solution to “micro-fundamentals” till factors like structural rigidity in CAD, declining savings rate, and growth without macro-economic stability are reduced.

If the situation does not improve (from these measures), redemption pressure of these borrowings will have an unfavorable impact on currency value.
Devendra Kumar Pant, Chief Economist, India Ratings and Research

Jaitley said, in the media meet, that earlier in the day the Reserve Bank of India Governor had made a presentation on the global economy and on external factors that could impact the Indian economy. The broad conclusion of that presentation was that India’s growth rate is above that in other economies and inflation is within a moderate range.

As for external factors, the rise in the dollar and in crude prices and the trade wars are impacting India’s economy despite its soundness, Jaitley said. One area that needs special attention is the rising current account deficit, he said before announcing the five measures. The government will take necessary steps to cut non-essential imports and increase exports, he added.

Jaitley also reiterated that the government will maintain fiscal deficit targets.

Several recommendations have come in from the RBI and Finance Ministry officials and more announcements will be made in the days to come, he said.

Watch the Finance Minister’s brief press conference here.