FM Arun Jaitley announces 5 steps to stem rupee slide

The government on Friday announced a slew of measures aimed at stemming a sharp plunge in rupee, the worst-performing Asian currency this year.

The measures announced by Finance minister Arun Jaitley in a meeting with Prime Minister Narendra Modi were primarily aimed at easing conditions related to external commercial borrowings, hedging conditions for infrastructure loans, and loosing restrictions on masala bonds.

"I think these are all positive measures. A little more perhaps have been done but whatever has been done, by itself is a very positive measure. I don’t think these measures will help immediately but in the medium-term to long-term, it will definitely help," Keki Mistry, vice chairman and CEO of HDFC Ltd, said.

The moves follow sharp declines in the rupee, which has weakened about 12 percent this year amid higher oil prices and an emerging markets sell-off.

Here are the five key measures announced by the government:

Mandatory hedging conditions for infrastructure loans will be reviewed. As of now, such borrowings must be fully hedged, which makes it expensive for companies to raise funds overseas.

"Thus, easing of the mandatory requirements in this domain could make it cheaper for infrastructure companies to raise funds as well as refinance costlier debt," Abheek Barua, chief economist at HDFC Bank said in a report.

The government permitted 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.

This could make dollar borrowing attractive for short-term capital needs and bring down hedging cost for such borrowings.

A 20 percent exposure limit on investments by foreign portfolio investors in debt to a single corporate group will be removed.

Earlier this year, the RBI already eased some of the restrictions in this regard. For example, the central bank allowed foreign portfolio investors to invest in corporate bonds with minimum residual maturity of above one year (the requirement was three years earlier). However, it had kept exposure limits unchanged – which could be eased now.

Masala bonds will be exempted from withholding tax this financial year and Indian banks will be allowed to become market makers in masala bonds including by underwriting.

Industry estimates in this regard show that withholding tax (of around 5 percent) generally adds 40-50 basis points to the cost, and at times takes the overall cost of borrowing (through Masala bonds) higher than what an issuer might have received in the domestic rupee market, according to a HDFC Bak report.

One basis point is one-hundredth of a percentage point.

The government also removed restrictions on Indian banks on marketing and under writing of masala bonds.