Project 'Revive Rupee' by RBI

The Reserve Bank of India (RBI) on Monday afternoon tinkered at the margins of India's capital account to attract more foreign investment to bolster the exchange rate and also expand options for manufacturing and infrastructure companies looking to access to cheaper loans abroad.

An RBI statement said Monday's announcements had been made in consultation with the government, presumably the slew of measures finance minister Pranab Mukherjee promised over the weekend. Mukherjee's promise came at the end of a week when the rupee depreciated three per cent against the US dollar and closed at Rs 57.15.



The central bank's announcements can be split into two categories. First, quantitative limits of foreign investment in government securities market have been increased by $5 billion to an overall cap of $20 billion to attract more foreign portfolio flows. In addition, an attempt is to be made to attract sticky foreign investment from long-term investors such as pension funds into the government securities market.

RBI has also opened the door to Qualified Foreign Investors (QFIs) to park money in Indian mutual funds that have a minimum of 25 per cent of their assets in the infrastructure sector.


Other than trying to pull in foreign money, Monday's announcement tries to free Indian manufacturing and infrastructure companies from the shackles of high interest rates. RBI will allow these companies to borrow overseas on a case-by-case basis (approval route) subject to an overall ceiling of $10 billion.

Monday's announcements are in the line of similar measures announced by the government over the last few months. The essence of these measures is an attempt to loosen capital account controls for handpicked categories of foreign investors in an attempt to attract foreign investment.

R. Gopalan, secretary of the finance ministry's Department of Economic Affairs, led an official team to Dubai and Riyadh earlier in the month to engage foreign investors in the backdrop of credit rating agencies marking down their outlook for the Indian economy. According to Gopalan, the feedback from investors was that they wanted controls on India's capital account to be loosened to facilitate easy entry and exit. Monday's announcements have partly met that requirement.

The announcements and the ones preceding are at best a palliative for India's challenges in the external sector. Tinkering at the margins of the capital account cannot solve problems and may not attract significant sticky inflows. A slowdown in economic growth, now to a nine-year low of 6.5 per cent in 2011-12, is the primary cause for other problems.

"The best signal we can send out is trying to go back to high growth path we had seen earlier," C. Rangarajan, chairman of the Prime Minister's Economic Advisory Council, told Business Today in mid-June, while talking about challenges in the external sector.