FinMin wakes up to panic, to boost rupee - mydigitalfc.com

The finance ministry has finally woken up to the panic created by massive depreciation of the rupee, announcing a number of measures to be initiated in the next few days to step up foreign investment flows in order to stabilise the currency and narrow the widening gap in the current account. In the immediate context, the government is likely to scrap the auction route for foreign institutional investors (FIIs) buying government papers. Instead, government debt papers, called G-secs, would be available through the "on-tap system". The government has already dispensed with the auction route for FIIs buying corporate bonds. On Monday, when the rupee sank to its new low of 58.17 to the dollar, the economic affairs secretary in the finance ministry said the panic in the market was unwarranted. But when it plunged further, losing 25 paise to the dollar, it must have been the turn of the government to panic. With merger limits on QFIs, corporate bonds and long-term infrastructure bonds, the overall FII limit had gone up to $51 billion. This will create room for market watchdog Sebi to replace the auction mechanism by the on-tap system for corporate paper since April 1. FIIs are allowed to invest up to $25 billion in government securities, but have invested only $18 billion so far. Now, the government will attempt to raise the additional $7 billion through on the tap-system, bypassing initial formalities needed for issue of government bonds, a government official said withotu wanting to be identified by name. The chief economic adviser in the finance ministry Raghuram Rajan declined to specify the steps being contemplated to stem the slide in rupee. Rajan said the finance ministry will announce steps to increase foreign investment flows to strengthen rupee and regulators will act at "appropriate time" to contain the fall in domestic currency that touched a record low of 58.98 to a dollar on Tuesday. "We will continue to implement measures to ensure that portfolio investor inflows are enabled and encouraged and some of these measures will be announced very shortly," Rajan told reporters. He added, "in the coming weeks, we will recommend to the cabinet, policies to enhance FDI limits on a number of areas." These would include defence and telecom. "From our side, our intent is to create conditions for narrowing the current account deficit as well as stabilise financing of the rupee," he said. The proposal is to raise FDI cap in defence to 49 per cent from the present 26 per cent and telecom to 100 per cent from the present 74 per cent has been under consideration for some time. "All this will help not only in the short-term objective of financing the CAD safely, but also in the long-term objective of ensuring sustainable growth," he said. There were also reports that the government may come out with NRI bonds to attract overseas funds. But Rajan was evasive when asked about these reports. He only said the government would be looking at all options for safe financing of CAD.... "It is still early days." In the past, the government had mobilised funds through India Development Bond (IDB) of 1991, Resurgent India Bonds (RIB) in 1998 and India Millennium Deposits (IMD) in 2001, but these require a lot of preparation and there would be pressure at the time of redemption as well. The response to NRI bonds could be good only when they are made highly attractive. On the rupee's free fall of nearly 10 per cent in the past six weeks and over 2.5 per cent in past two trading sessions, Rajan said, "A large part of the rupee decline was due to the dollar gaining strength. "There has been some volatility in the financial markets in the last few days. The government, RBI, and Sebi are watching market developments and each one will take actions as warranted," he said. The exchange rate has depreciated about 5.5 per cent since January 1, at par with Korea, Turkey and Brazil and much less than South Africa. "Clearly, a large part of the decline in the value of the rupee in recent days is because of the dollar's strength. Emerging market currencies across the world have depreciated as debt outflows have increased, following the Fed's suggestion that its asset purchases may be tapered down in September. My understanding is that any tapering will be measured, but markets have reacted," he said. He agreed that the 7.5 per cent fall in the rupee's value cent since May 1, was significant. However, he believed this was only partly due to the debt outflows after the Fed's remarks. He said, "I say partly, because despite the debt outflows, portfolio inflows between May 1 and June 10 have been significant." India has received net equity inflows of $4.162 billion, and lost $486 million in debt outflows against a net inflow of $3.675 billion. The other reason for rupee weakening is that typically, the May 2013 CAD is larger because of seasonal factors. To top that, higher gold imports in the wake of falling prices have been the main reasons for a weak rupee, he said. He also said no additional restrictive measures would be contemplated against gold imports. The government recently raised import duty on gold to 8 per cent from 6 per cent. Monthly gold imports stood at around 150 tonnes on an average between April and May as against 70 tonnes in 2012-13.The Reserve Bank of India too has taken some measures to curb the apetite for gold. Asked if the demand for dollar by oil marketing companies had added to the rupee's woes, Rajan said the oil companies had agreed to spread their dollar purchases in the foreign exchange markets as much as possible to reduce pressure on the rupee. krsudhaman@mydigitalfc.com via Business - Google News http://news.google.com/news/url?sa=t&fd=R&usg=AFQjCNF12WGNl8TrryJtIEj9z10fT-lnmw&url=http://www.mydigitalfc.com/plan/finmin-wakes-panic-boost-rupee-779

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