Government's Step to Stabilize Indian Currency against Foreign Market

Government's Step to Stabilize Indian Currency against Foreign Market

      The five measures involves:

1. Mandatory hedging conditions for infrastructure loans through the external commercial borrowing (ECB) route will be reviewed.
2. 20 percent exposure limits of foreign portfolio investors’ corporate bond portfolio to a single corporate group, company and related entities will be removed, and 50 percent of any issue of corporate bonds will be reviewed.
3. Manufacturing sector entities will be permitted to avail external commercial borrowings up to $50 million with a minimum maturity of one year instead of the earlier period of three years.
4. Masala Bond issues done in the current financial year will be exempted from withholding tax.
5. Restrictions on Indian banks’ market making in Masala Bonds, including restrictions on underwriting of such bonds, will be removed.

Gravity:

These five concrete steps announced would help increase inflows by $8-10 billion. The measures are essentially on the capital account side where the aim is to infuse more dollars into the economy through routes like ECBs, FPI, Masala Bonds etc. There is intent to put some curbs on imports and give a push to exports. There can be no debate that all these measures are positive for the rupee as they attack the fundamentals of demand and supply for dollars.

Why is this needed?

The pressure on rupee and the current account may not be a short-term phenomenon. That’s because of rising interest rates in the US, high crude oil prices and its impact on emerging markets and the trade war between the US and China. Therefore, the government’s intervention was necessary.

What it will yield?

The measures announced by the government will work if the primary reason is weaker fundamentals. In case it is a global phenomenon, then it may not really help to correct the fall though it could cause some reversal in the first two or three sessions.

Also, it should be remembered that what the government has announced will take time to work through. There will be a review by companies on the hedging requirements for infra loans from global markets. For this to work, it will take time for companies to take such decisions.

Why Indian Rupee is Falling continuously Against the US Dollar?

The Indian currency had plunged by Rs 1.08, or 1.57 per cent, to a record low of 72 against the US currency amid fears that Turkish currency turmoil could turn out into global financial crisis.

The raise in oil prices has pulled down the rupee, by pushing up dollar demand.

Global Trade war fears triggered by the US and China’s retaliatory import tariffs have also weakened the Rupee.

The Chinese yuan has fallen sharply in the last few sessions. This also has triggered a dollar flight from many emerging economies. The Spurt in dollar outflow has pulled down most Asian currencies, including the rupee.