RBI relaxes external commercial borrowing norms in order to stem rupee fall

The Reserve Bank of India (RBI) on Wednesday liberalised some aspects of the external commercial borrowing (ECB) policy including its policy of rupee denominated bonds to stem rupee fall.

This is in continuation with the five-point plan that finance minister Arun Jaitley unveiled last week. Under the plan, government permitted manufacturing section to avail ECBs up to $50 million with a minimum maturity of one year as against earlier period of three years.

To operationalise this, RBI released its note and said, "ECB up to $50 million or its equivalent can be raised by eligible borrowers with minimum average maturity period of three years. It has been decided to allow eligible ECB borrowers who are into manufacturing sector to raise ECB up to $50 million or its equivalent with minimum average maturity period of one year."

Presently, Indian banks, subject to applicable prudential norms, can act as arranger and underwriter for rupee denominated bonds (RDBs) issued overseas and in case of underwriting an issue, their holding cannot be more than five percent of the issue size after six months of issue.

"It has now been decided to permit Indian banks to participate as arrangers/underwriters/market makers/traders in RDBs issued overseas subject to applicable prudential norms, RBI said.

Filippo Gori, head of markets & investor services at JPMorgan Asia Pacific told CNBC-TV18, "The INR would remain around 72 to the dollar up to June next year. There are two hikes coming from the RBI – one is October and other in December and possibly the government will defend the currency strongly even inter-meetings."

Last week, the government announced a five-point plan to control rupee depreciation. The measures, which included reviewing mandatory hedging conditions for infrastructure loans and removal of the 20 percent exposure limit on investments by foreign portfolio investors in debt to a single corporate group.

Vivek Rajpal, rates stategist, Nomura India said the measures announced by the government felt short of expectations.

"At the moment, currency depreciation is largely driven by global factors and not local. Hence, policy makers template is different than what it was in 2013,” Rajpal said.

Market experts believe global factors are the key reasons for rupee weakness.

Alvin Tan, currency strategist, Societe Generale said, "Some of the measures announced presumed that there was appetite by global investors for rupee assets but unfortunately at this stage animal spirits among international investors for emerging market assets, which include rupee assets are weak.

On Wednesday, the US dollar ended sharply lower against the rupee at Rs 72.37 per dollar.