Government announces measures to rescue sliding rupee

Over the weekend, the government announced measures it intends to take to halt the rupee slide and address the underlying issue—the widening current account deficit. An inflow of $8-10 billion is seen as immediate impact but the measures are aimed at turning around sentiment and building on the recovery toward the end of last week.

1. EASIER EXTERNAL COMMERCIAL BORROWINGS (ECBs)
*Only for manufacturing companies.

*Limited to $50 million.

*Residual maturity of one year against norm of three years.

WHAT GOVT WANTS TO ACHIEVE: Bring dollars in quickly but into the productive economy, not finance.

WILL IT WORK?: May improve sentiment Actual inflows may not be substantial & could take time.

2. MORE ZING FOR MASALA BONDS
*Masala bonds to be exempted from withholding tax

*Indian banks to be allowed to become market makers and underwrite the debt

WHAT GOVT WANTS TO ACHIEVE: Those looking to raise funds will bring plans forward

WILL IT WORK?: May not boost dollar inflows immediately Sentiment positive and good long-term steps make these bonds attractive

3. NO HEDGING FOR INFRASTRUCTURE ECBs
*Review mandatory hedging for infrastructure ECBs

WHAT GOVT WANTS TO ACHIEVE: Reduce pressure on rupee in the forward market, and temper overall demand

WILL IT WORK?: Yes, it can reduce shortterm pressure on rupee by reducing dollar demand. But may expose borrowers to losses if rupee weakens further

4. REVIEW OF FPI 4 EXPOSURE LIMITS
*Not more than 20% of a FPI’s corporate bond portfolio can be invested with a single corporate group

*Also, 50% of a single issue cannot go to any such group

WHAT GOVT WANTS TO ACHIEVE: Reduce pressure on debt outflows, encourage fresh debt investment

WILL IT WORK?: Measure most likely to succeed Can create more room for FPI flows