Rupee Depreciation

REASONS OF RUPEE SLIDING

Domestic Factors

·        Widening current account deficit means demand for dollars higher than supplies.

·        Policy paralysis and slowing economic growth had already made foreign investors jittery about India.

·        Political uncertainty ahead of 2014 polls added to fears.

·        RBI curbs on dollar outflows seem to have backfired. Investors see it as possible precursor to capital controls, rush to take out dollars while they can.

·        Foreign investors nervous that profits may get offset by rupee depreciation. Hence they exit while they can still book a profit or trim losses.  Speculators add to volatility by buying up dollars, expecting to sell the US currency when it appreciates further.

Global Factor

·        As Us economy started recovering, It prompted investors who has filed to emerging markets to re-invest to US assets.

·        Foreign investors rattled by US Federal Reserve Chairman Ben Bemanke’s indicating that Fed’s bond buying programme could be tapered off.

·        Ironically, fears of possible end to US growth stimulus triggered anxiety about impact on global economy, including India.

RBI STEPS TO CHECK RUPEE SLIDING

·        TIGHTENS HEADING RULES FOR FIIs.: To strengthen the rupee, the RBI on August 1 made it mandatory for foreign institutional investors (FIIs) to obtain the consent of holders of participatory notes (P-Notes) and derivative instruments before hedging.

·        PUTS CURBS ON OVERSEAS INVESTMENTS: The Reserve Bank of India on August 14 rolled out the big guns in a bid to protect the rupee. For individuals–Annual limit under Liberalized Remittance Scheme cut from $ 200,000 to $ 75,000 per individual. This can’t be used to buy immovable property overseas, such purchases now need RBI nod. Even gifts to relatives abroad can’t exceed $ 75,000, unless RBI clears them. For Companies– Companies will now need RBI nod to invest overseas beyond 100% of their net worth. Earlier limit was 400%. Navratna PSUs, oil and gas exploration exempted. For Gold–Ban on import of coins and medallions. Import norms, for export and jewellery included, tightened further.

·        EASES CRR NORMS FOR SOME DEPOSITS: The RBI said in a statement on August 14 that incremental three-year foreign FCNRB and NRE deposits with reference base dates of July 26 and above will be exempted from the cash reserve and statutory liquidity ratios. The Cash Reserve Ratio (CRR) is the proportion of cash deposits banks have to keep with the central bank in cash.

·        TO BUY ` 8,000 CRORE BONDS TO EASE LIQUIDITY: The Reserve Bank of India moved in on August 20 to ease up availability of cash in the markets. The RBI will buy government bonds for Rs 8,000 crore as may be warranted by the evolving market conditions. RBI has now permitted banks to retain

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